Tax in Kentucky: a complete guide
When you start checking out your tax obligations in Kentucky, you realize there’s plenty to learn and explore. Our tax guide divides it into manageable sections, from income tax to sales, property and inheritance.
Understanding tax in Kentucky
Kentucky, the Bluegrass State, is close to the US average for income tax, while sales and property taxes are both a little below. There are a couple of unique aspects to note.
Firstly, local occupation taxes are collected by counties and cities and taken from your wages and business earnings. The rates range from 0.00075 percent to 2.5 percent. The second point to note is inheritance tax. Kentucky is one of a small group of states to levy this tax.
Kentucky income tax
Since 2018, Kentucky has imposed a flat income tax rate of 4.5 percent regardless of your income. This differs from the federal income tax rate, which uses a progressive rate system, charging higher rates for higher incomes.
To calculate the tax you owe as a Kentucky resident, you must make certain additions and subtractions to your federal adjusted gross income (AGI). The resulting figure is Kentucky taxable income, to which the state-specific rates are applied.
The table shows the essential simplicity of personal income tax regulations in Kentucky.
| Kentucky personal income tax rate | Single person | Married couples filing jointly |
|---|---|---|
| Five percent | $0 | $0 |
The state uses a range of modified gross income thresholds to decide who needs to file a tax return. Here are the thresholds, listed by family size.
| Size of family | Modified gross income threshold |
|---|---|
| One | More than $12,760 |
| Two | More than $17,240 |
| Three | More than $21,720 |
| Four | More than $26,200 |
Retirement income is often tax-exempt in Kentucky, even though you pay tax on it at the federal level. This applies to Social Security benefits, Kentucky governmental retirement systems income plus pension and annuity income up to $31,110. Active-duty military pay is also exempt from state taxes.
Kentucky sales taxes
The sales tax rate in Kentucky is also relatively simple. It is a flat rate of six percent. You’ll find that most goods and services are subject to this flat rate.
In 2018, the legislators increased the number of services subject to sales tax. These included admissions to movies, theme parks and other attractions, and accommodation lasting more than 30 days. Communication services, pet care, fitness and recreational sports, laundry and extended warranties were also included in a fairly extensive list.
Common exemptions include most food, prescription drugs and clothing, although big buys such as vehicles are subject to the six percent rate.
Some products attract a selective sales tax with a different rate. These include:
The gasoline tax of 26 cents per gallon
A cigarette tax of $1.10 per pack of 20
Liquor, with an excise tax of $1.92 per gallon
Beer, which is taxed at a rate of eight cents per gallon
Wine, with a tax rate of 50 cents per gallon
Kentucky property tax
Kentucky property taxes are among the lowest in the United States.
On average, homeowners pay just 0.8 percent property tax annually, based on a percentage of home value. Be aware that there is a lot of variation depending on where you live. For example, county rates can range from 1.17 percent in Campbell County to 0.51 percent in Carter County.
According to Zillow, the average home value in Kentucky in February 2023 was $188,241. If you plan to retire to Kentucky, this is important, not just because it gives you a feel for the market but because for homeowners over 65, $46,350 of the assessed value of a residential property is exempt from state taxes.
Kentucky motor tax
There’s a six percent motor vehicle usage tax levied on the retail price of new and used vehicles in Kentucky. There is also a gas tax on motor fuels, which is 28.7 cents a gallon for gasoline and 26 cents per gallon for diesel.
Kentucky estate tax
Although Kentucky has an inheritance tax payable on your estate, your spouse, parents, children, grandchildren and siblings are exempt.
Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren enjoy $1,000 tax-free but must then pay between four and 16 percent, depending on the value of your property.
All other heirs are taxed between six and 16 percent, with a lower tax-free amount of $500.
Kentucky retirement tax
Kentucky is generally a tax-friendly state for retirees. Social Security income is exempt from taxation, while other forms of income, such as from pensions, 401(k), or IRA, are exempt up to a limit of $31,110 per person. Anything above this limit will be taxed at the state’s standard 4.5 percent rate.
There’s another Kentucky tax worth noting if you’re planning to retire to the state: capital gains tax. Capital gains are regarded as normal income, so any other work or retirement money that exceeds the $31,110 threshold will be viewed as taxable income at the standard state rate.
However, Kentucky isn’t hiding any nasty tax surprises for retirees. Mostly it falls below or close to the average for taxation rates. Naturally, your exact circumstances and plans are key elements to consider when considering a move to the state.
For further tax guidance and to ensure you’re not paying more tax than you need to, it’s wise to speak to an expert. A financial advisor can help you handle all your tax queries and ensure you’re not paying more tax than needed.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.