Kentucky Retirement Tax Friendliness

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?

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 capital gains tax.

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Is Kentucky tax-friendly for retirees?

Yes, Kentucky is fairly tax-friendly for retirees. As is 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 below average property taxes. However, the state inheritance tax may be a negative for some retirees.

Is Social Security taxable in Kentucky?

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 the state allows you to 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 4.5% income tax rate that all filers pay in Kentucky. The state income tax drops to 4% in 2024. 

Kentucky charges local occupational taxes at the county and city level. However, these rates only apply to wages, salaries and other forms of compensation for employees in the state. Therefore, retirees will not be on the hook for these taxes.

How high are property taxes in Kentucky?

The typically homeowner in Kentucky pays $1,308 annually in property taxes. That’s largely due to the low home values in the state (the median home value is $158,500). The median effective property tax rate in Kentucky is 0.82, lower than the national median of 1.01.%.

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 every two years. For both 2023 and 2024, it's equal to $46,350. That amount is subtracted from assessed value, the value to which tax rates are applied.

How high are sales taxes in Kentucky?

State sales taxes in Kentucky are around average at 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.

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 that retirees 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 and daughters- and sons-in-law, receive an exemption of $1,000. Otherwise, they will pay rates beginning at 4% and climbing to 16%. Non-relatives and cousins receive an exemption of $500 and then pay rates beginning at 6% and reaching 16%.