Kentucky taxes for early retirees: a 3.5% flat tax and a $31,110 pass on your IRA at any age

By Tom, CPA · Updated October 29, 2026

TL;DR: Kentucky's 2026 rate is a flat 3.5%. Each person can exclude $31,110 of pension and IRA income at any age, Social Security is exempt, and an inheritance tax hits heirs outside close family.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Kentucky is cutting its income tax on a schedule, like a barber who only trims half an inch a year. The flat rate is 3.5% for 2026, down from 4% in 2024 and 2025. Social Security is exempt. Each taxpayer can exclude up to $31,110 of pension, IRA and 401(k) income, and there's no age requirement.

That no-age part is the quiet win for early retirees. A 45-year-old taking IRA withdrawals gets the same exclusion as a 75-year-old. The catch is Kentucky's inheritance tax, which still exists, and the fact that local occupational taxes and property taxes vary a lot. Frugal Fran is here for the bourbon-free budgeting. Lavish Larry is here for the bourbon.

CPA Warning Label: The $31,110 exclusion is per person and tied to whose account the money comes from, so one spouse's unused exclusion can't shelter the other spouse's IRA.

The 2026 rate and standard deduction

Under KRS 141.020, Kentucky's individual income tax rate is 3.5% for tax years beginning on or after January 1, 2026. It was 4% for 2024 and 2025. Further cuts aren't automatic: the law lets the rate fall again only if revenue triggers are met and the General Assembly acts.

The Department of Revenue announced the 2026 standard deduction of $3,360, a $90 increase over 2025. Kentucky has no personal exemption. Married couples can file a joint return or separate returns on the same form, and the standard deduction rules differ by how you file, so check the Form 740 instructions for your case.

Retirement income: the $31,110 exclusion

Kentucky's pension income exclusion, claimed on Schedule P, lets each taxpayer exclude up to $31,110 of retirement income. It covers:

• Private and public pensions and annuities
• Traditional IRA distributions, including amounts that are taxable because of a Roth conversion
• 401(k), 403(b) and 457 deferred compensation distributions

There's no minimum age. On a married return, each spouse claims the exclusion against their own retirement income, so a couple can exclude up to $62,220 if each has at least $31,110 of their own. If one spouse has all the IRA money, the other spouse's exclusion goes unused. That's a reason to think about whose accounts you draw from.

Government retirees with service before January 1, 1998 can exclude more under the Schedule P worksheet. Military retirement pay is fully exempt for tax years starting in 2023, according to the Department of Revenue.

• Social Security: fully exempt.
• Qualified Roth withdrawals: not in federal AGI, so not taxed.
• Capital gains, dividends and interest: taxed at 3.5%. The exclusion doesn't cover brokerage income.

Illustration: Frugal Fran is single and 62, and for 2026 she takes $50,000 from her IRA and realizes $20,000 of long-term capital gains. Kentucky income is $70,000. She excludes $31,110 of the IRA money and takes the $3,360 standard deduction, leaving $35,530. Tax is 3.5% of $35,530, or $1,243.55. In 2025, with a 4% rate and a $3,270 deduction, the same income would have left $35,620 taxable and a $1,424.80 bill. The rate cut saves Fran $181.25.

Roth conversion math in Kentucky

The exclusion makes Kentucky an unusually good state for small Roth conversions. Up to $31,110 per person of IRA distributions, including conversions, is excluded. A married couple each converting $31,110 from their own IRAs could pay $0 in Kentucky tax on $62,220 of conversions, assuming no other retirement income uses up the exclusion. Above that, conversions cost 3.5%.

Federal tax still applies to every dollar, so the Roth conversion ladder math is driven by your federal bracket. Kentucky just stays out of the way for the first $31,110 each. Larry calls this "the bourbon allowance," which the Department of Revenue would not endorse.

Withdrawal order for Kentucky couples

The per-person design of the exclusion rewards a little planning. Some practical rules of thumb:

1. Fill both exclusions before anything else. If both spouses have IRAs, draw at least $31,110 from each one before taking more from either. That's $62,220 a year of retirement income Kentucky never sees.
2. Spread the money around early. If one spouse has most of the pre-tax savings, rolling old 401(k)s into IRAs doesn't change ownership, but future contributions while still working can go to the spouse with less.
3. Brokerage gains don't get the exclusion. Every dollar of gain or dividend is taxed at 3.5%, so a household living mostly on taxable accounts pays more Kentucky tax than one living on IRA money below the exclusion.
4. Don't forget the rate cut. If you can shift a large taxable sale from December 2025 to January 2026, it drops from 4% to 3.5%. That ship has mostly sailed, but future cuts could create the same opportunity, so watch the General Assembly.

Local taxes: the part people forget

Many Kentucky cities and counties levy occupational license taxes on wages and business profits. Retirees living on investment and retirement income usually aren't subject to them, since they generally apply to earned income. If you do consulting or part-time work, check your local rate. Some school districts also levy taxes; check where you live.

Kentucky sales tax is 6%, and the Department of Revenue says there are no local sales and use taxes. That's one number you won't have to look up by zip code.

Property tax and the homestead exemption

Kentucky's homestead exemption for 2025 and 2026 is $49,100 of assessed value. It's available to homeowners who are 65 or older or totally disabled. Apply with your county Property Valuation Administrator; ask your PVA about the application deadline in the year you turn 65. The exemption is adjusted every two years for inflation. Kentucky's property tax rates are moderate compared with the Midwest, but local rates vary a lot.

Inheritance tax: yes, still

Kentucky has no estate tax, but it does have an inheritance tax, paid by some heirs. For deaths on or after January 1, 2026, KRS 140.070 (as amended in 2026) sorts heirs into three classes:

For most families leaving money to a spouse and kids, the tax is zero. If you plan to leave money to a longtime partner or a friend, Kentucky wants a cut. Charities are generally exempt. For federal rules, see estate tax basics.

Residency, estimated payments and how Kentucky compares

Kentucky taxes residents on all income and part-year residents on income received while living there. For tips on making a move stick, see changing your state residency. Under KRS 141.305, you generally need estimated payments if you expect more than $5,000 of income with no Kentucky withholding, but none are required if your estimated tax is $500 or less. Many retirees just ask their IRA custodian to withhold.

Compared with neighbors, Kentucky is in the middle. Tennessee has no income tax at all, Ohio has a graduated income tax with local taxes, and Virginia has higher rates with an age-based deduction. For an early retiree with a modest IRA and no plans to leave money to non-relatives, Kentucky is cheaper than it looks. Watch the federal tax torpedo if you combine big withdrawals with Social Security.