How does Kentucky tax retirement income?

Kentucky is a good state to retire if you want to enjoy good weather, explore the outdoors, and reconnect with nature. The horse racing capital is also ranked among the most affordable states due to its low cost of living and low taxes. Here are the taxes you should expect to pay when you retire in Kentucky.

Kentucky does not tax social security benefits. Other retirement incomes like pension and retirement account distributions are exempt up to $31,110 per person. Therefore, if your total retirement income is below $31,110, you won’t owe state income taxes. However, if the retirement income exceeds $31,110, you will pay a 5% income tax rate on your retirement income.

Is social security taxable in Kentucky?

If you receive social security benefits, Kentucky exempts this income from income taxes. Therefore, when calculating your adjusted gross income (AGI), you will be allowed to deduct the social security income from the AGI.

However, you will still owe federal income taxes on the social security income. If you are filing the federal tax return as an individual, you will owe income taxes on up to 50% of your social security income if your gross income is above $25,000 but below $34,000. If your income exceeds $34,000, you will pay income taxes on up to 85% of the money.

In comparison, a married couple filing jointly will owe federal income tax on up to 50% of their social security if the benefits are more than $32,000 but below $44,000. If the benefits exceed $44,000, they will pay federal income taxes on up to 85% of their income.

Is retirement income taxable in Kentucky?

Although social security is exempt from income taxes in Kentucky, you will pay income taxes on other forms of retirement income if the combined gross income exceeds a certain threshold.

You can deduct up to $31,110 from your combined retirement income. For example, if the total retirement income from pension, 401(k) distributions, and IRA income is $30,000, it means your combined retirement income will be fully deductible, and you won't owe any state income taxes on the money. However, if the combined retirement income exceeds $31,110, you will pay a 5% income tax rate on the retirement income.

What is Kentucky's state and local sales tax rate?

Kentucky charges a modest sale tax of 6% on goods and services purchased in the state. These taxes are imposed at the state level, and local governments cannot collect their own sales taxes at the local level. Instead, local governments collect their own income taxes.

Certain items are exempt from sales taxes in Kentucky (PDF). Examples of these items include most groceries, prescription drugs, and prosthetic devices. However, this exemption does not apply to alcoholic beverages, dietary supplements, tobacco, candy, and prepared foods, which are subject to the 6% sales tax.

Is military pay taxable in Kentucky?

Effective 2010, Kentucky exempts active duty military pay from state income taxes. This exemption applies to all active-duty personnel of the Armed Forces, National Guard, and the reserve component of the US military.

If you do not have any other income apart from active duty military pay, you are not required to file income taxes as long as you are a legal resident of Kentucky. This exemption applies to all military personnel who are Kentucky residents regardless of their station. If the income tax is wrongly withheld from the military pay, the Kentucky Department of Revenue is required to refund the withheld taxes.

If you are a full-year resident of Kentucky, the military income should be deducted on Schedule M of the Kentucky income tax form, while part-time residents should deduct the military income on Form 740-NP. 

Kentucky Personal Income Taxes

If you earned income as a Kentucky resident, or you are a non-resident with earned income from Kentucky, you must file individual income taxes. The state income tax rate is 5%, and everyone pays an equal tax rate as long as they meet the income requirements.

When you file your Kentucky tax return, you may elect to take a standard deduction or itemize your deductions. If you are a single filer, you can claim a standard deduction of $2,690, while married couples filing jointly can claim a tax deduction of $5,380.

If you were a full-year Kentucky resident, your filing requirements depend on your family size and modified gross income. You must file the annual tax return if your modified gross income is more than the income limit. The modified gross income limit is $12,760 for a family of one, $17,240 for a family of 2, $21,720 for a family of 3, and $26,200 for a family of 4.

A full-year Kentucky resident uses Form 740 to file the annual tax return, while a partial-year resident or a full-year non-resident uses Form 740-NP to file the annual return.