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Kentucky Retirement Tax Friendliness

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Overview of Kentucky Retirement Tax Friendliness

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
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Annual Wages
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Annual Income from Private Pension
Annual Income from Public Pension
You will pay of Kentucky state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
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. more
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Kentucky Retirement Taxes

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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.

A financial advisor in Kentucky can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.

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 seniors.

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 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 charges local occupational taxes on 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?

Kentucky homeowners pay $1,257 annually in property taxes on average. That’s partly because of low home values in the state (the median home value is $151,700), but also because of low rates. The average effective property tax rate in Kentucky is 0.83%.

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. For 2019-2020, it's equal to $39,300. That amount is subtracted from assessed value, the value to which tax rates are applied. At the state average effective property tax rate, that adds up to annual savings of about $340. The next adjustment, not yet released, will be for the 2021 and 2022 assessment years.

How high are sales taxes in Kentucky?

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State sales taxes in Kentucky are relatively low 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 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 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 receive an exemption of $500 and then pay rates beginning at 6% and reaching 16%.

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.

Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.

To calculate the expected income tax this person would pay in each location, we applied the relevant 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 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 after subtracting 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 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. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration