Kentucky fully exempts all Social Security income from taxation while providing a significant deduction for seniors receiving other types of retirement income. The state has relatively low sales and property taxes.
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Annual Social Security Income
Annual Retirement Account Income
Year of Birth
Annual Income from Private Pension
Annual Income from Public Pension
|is toward retirees.|
|Social Security income is taxed.|
|Withdrawals from retirement accounts are taxed.|
|Wages are taxed at normal rates, and your marginal state tax rate is %.|
- Our Tax Expert
Jennifer Mansfield, CPA Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
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Kentucky Retirement Taxes
Horse racing, good bourbon and mild winters. These are just a few reasons to consider a Kentucky retirement. But what about the state’s taxes?
Add them to the list. The Bluegrass State’s tax-system is generally favorable toward retirees. It fully exempts all Social Security income from taxation while providing a significant deduction for seniors receiving other types of retirement income. The state also has relatively low sales and property taxes.
On the other hand, seniors may take pause with Kentucky’s inheritance tax and its capital gains tax. Read on to learn more about these and other important retirement taxes in Kentucky.
Is Kentucky tax-friendly for retirees?
Yes, Kentucky is fairly tax-friendly for retirees. As mentioned in the prior section, it does not tax Social Security income. Other forms of retirement income (pension income, 401(k) or IRA income) are exempt up to a total of $31,110 per person.
The state’s sales tax rate is 6%. This is below the national average and much lower than the sales taxes of other states in the region. Kentucky also has relatively low property taxes. However, the state inheritance tax may be a negative for some seniors.
Is Social Security taxable in Kentucky?
No. All Social Security retirement benefits are exempt from the Kentucky state income tax. When you calculate your adjusted gross income (AGI) for Kentucky income taxes, you will be able to subtract all income that you received as Social Security and Railroad Retirement Board benefits. To do this, you will need to complete Schedule M and attach it to your Form 740 (Kentucky’s income tax form).
Are other forms of retirement income taxable in Kentucky?
Yes, but seniors can deduct up to $31,110 on all types of retirement income. So, if you have $20,000 in income from a pension and another $10,000 from an IRA, your retirement income will be fully deductible. If your total retirement income exceeds the deduction amount, you will need to pay the standard 5% income tax rate that all filers pay in Kentucky.
Kentucky seniors must also pay local taxes on all income from retirement accounts. These taxes, collected at both the county and city levels, can be higher than 3%. The table below shows the local income tax rate in every Kentucky county and all major Kentucky cities.
KY Local Income Tax Rates
|County||County Income Tax Rate|
|City||City Rate||County Rate||Total Local Income Tax|
How high are property taxes in Kentucky?
Not very. In fact, most Kentucky homeowners pay less than $1,100 annually in property taxes. That’s partly because of low home values in the state (the median home value is $126,100), but also because of low rates. The average effective property tax rate in Kentucky is 0.85%.
What is the Kentucky homestead exemption?
Seniors (65 and older) who own and occupy their home are eligible for the Kentucky homestead exemption. The exemption amount changes annually. In 2017-2018, it was equal to $37,600. That amount is subtracted from assessed value, the value to which tax rates are applied. At the state average property tax rate, that adds up to annual savings of about $300.
How high are sales taxes in Kentucky?
Sales taxes in Kentucky are relatively low. The state rate is 6%, but unlike most other states, local governments cannot collect their own sales taxes in the Bluegrass State. (This is in part because localities collect their own income taxes, as described above.)
A number of items commonly purchased by seniors in Kentucky are exempt from sales tax. Prescription drugs, prosthetic devices and most types of groceries can all be purchased tax-free.
What other Kentucky taxes should I be concerned about?
There are two other taxes in Kentucky that may affect seniors and retirees. The first is the capital gains tax. Capital gains in Kentucky are taxed as normal income. That means, in combination with work income and any retirement income in excess of the deduction described above, they are considered part of your total taxable income.
The second tax seniors should know about is the Kentucky inheritance tax. How much you pay in inheritance tax will depend on your relationship to the deceased. If you are a direct relative, like a spouse, parent, child, grandchild, brother, sister, half-brother or half-sister, you are exempt from paying inheritance tax.
Indirect relatives, such as aunts, uncles, nieces, nephews, great-grandchildren, daughters- and sons-in-law receive an exemption of $1,000. Otherwise they will pay rates beginning at 4% and climbing to 16% for all inheritance above $200,000. Non-relatives receive an exemption of $500 and then pay rates beginning at 6% and reaching 16% for inheritance exceeding $60,000 in value.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration