Kentucky Tax Guide 2026

Personal income tax — the flat-tax trigger system

HB 8 of 2022 collapsed Kentucky from a 6-bracket structure (top 5.0% on income > $75k) to a 5.0% flat tax, then set automatic 0.5%-per-year reduction triggers based on General Fund receipts exceeding certain reduction conditions and budget reserve balance. Trigger-based reductions to date: • 2023: 5.0% → 4.5% (trigger met) • 2024: 4.5% → 4.0% (trigger met, HB 1 of 2024) • 2025: 4.0% maintained (trigger NOT met for 2025 reduction) • 2026: 4.0% maintained If future triggers fire, the rate could continue downward in 0.5% increments — long-term direction is toward 0%, though no statutory mandate for elimination. Standard deduction: $3,160 (indexed; single and MFJ both — Kentucky has no marriage adjustment in SD). Personal exemption replaced by tax credit ($10 per person). Social Security: 100% EXEMPT from Kentucky income tax. Pension/retirement income: $31,110 per person excluded under KRS §141.019(1)(j) — covers most middle-income retiree distributions; high-income retirees see the excess taxed at 4%.

Local occupational license taxes — the burden

Kentucky cities and counties IMPOSE LOCAL OCCUPATIONAL LICENSE TAXES on wages and net profits earned within the jurisdiction: • Louisville/Jefferson County: 2.20% (1.45% city + 0.75% transit) • Lexington/Fayette County: 2.25% • Bowling Green: 1.85% • Covington: 2.45% • Newport: 2.50% • Owensboro: 1.78% • Frankfort: 1.95% • Florence: 2.00% Applies to: • W-2 wages earned within city limits (withheld by employer) • Self-employment net profits sourced to the city • Partnership distributive shares Non-residents who work in Louisville from a Louisville office owe the 2.20% on wages even if they live in Indiana — paid through employer withholding. Occupational tax + 4% state = effective combined rate of ~6.2% in Louisville on wage income — comparable to several true-state-income-tax-plus-local jurisdictions. No overlap relief: occupational tax is paid in ADDITION to state, not credited.

Sales tax and service-tax expansion

State sales tax 6% (KRS §139.200). Kentucky DOES NOT permit local sales taxes — the cleanest sales tax in the US after Maryland, Indiana, and the no-sales-tax states. HB 8 of 2022 (the same bill that flattened the income tax) expanded sales tax to MANY SERVICES previously exempt — to offset income tax losses: • Landscaping, lawn care, gardening services • Personal training, weight loss/health services • Limousine services • Photography and photo finishing • Marketing services • Cosmetic surgery (non-medically-necessary) • Web design and hosting (effective 2023) • Approximately 30 additional service categories The service-tax expansion is intended to offset state revenue losses from income tax cuts — Kentucky moved toward a consumption-based tax model. Groceries: exempt. Prescription drugs: exempt. Economic nexus (KRS §139.340): $100,000 in cumulative sales OR 200 transactions.

Inheritance tax — still in effect

Kentucky is one of only 6 states with an INHERITANCE TAX (KRS §140.080). Distinguished from estate tax — taxes the RECIPIENT, not the estate. Rate structure depends on relationship to decedent: • Class A (spouse, children, grandchildren, parents, siblings): 100% EXEMPT — no inheritance tax • Class B (nieces, nephews, daughters/sons-in-law, aunts/uncles): 4%–16% on amounts above $1,000 exemption • Class C (other beneficiaries, including non-relatives, charities not exempted): 6%–16% on amounts above $500 exemption No Kentucky estate tax (separate concept — was repealed; only inheritance tax remains). Planning trap: Kentucky residents leaving substantial assets to nieces/nephews/cousins face state inheritance tax up to 16% on top of federal estate tax — significant for blended families or unmarried partners.

Business considerations

Corporate income tax: 5% flat (KRS §141.040). Limited Liability Entity Tax (LLET, KRS §141.0401): every LLC, LLP, S-corp, and partnership (not just C-corps) pays a minimum $175/year LLET PLUS the greater of: • 0.095% of Kentucky gross receipts, OR • 0.75% of Kentucky gross profits LLET is a SECONDARY tax that applies before owner-level income tax — entities with high gross receipts but low margins (e.g., distributors, contractors) face meaningful LLET regardless of net income. PTET available (HB 360 of 2023): entity-level election at 4% flat individual rate. Apportionment: single-sales factor for most industries. Unemployment tax: 0.225%–9.0% on $11,400 wage base.

Worked example: Vanessa Carter, Louisville-based freelance graphic designer (single, 2026)

Vanessa operates a single-member LLC in Louisville. Net SE income $95,000 from design services. Owns a $310,000 Louisville home.

Federal: SE tax + federal income tax + §199A 20% QBI (graphic design = SSTB? generally NO if not consulting/health/law/accounting; she likely qualifies for full QBI). Kentucky state: Federal AGI (after half-SE): ~$88,300 Less standard deduction: $3,160 Less federal QBI conformity: ~$19,000 Kentucky taxable: ~$66,140 Tax at 4% flat: $2,646 Louisville occupational license tax: Net SE profit attributable to Louisville: $95,000 Less LLET amount paid (small): negligible Tax: $95,000 × 2.20% = $2,090 LLET (KRS §141.0401): Greater of (gross receipts × 0.095%) = $95,000 × 0.095% = $90 OR (gross profits × 0.75%) ≈ $750 Minimum $175 applies → pay $750 (greater of formula) Actually greater is $750, compared to minimum $175 → pay $750 Property tax on $310k Louisville home @ ~1.04% effective: ~$3,224/yr Kentucky combined annual state + local + LLET: $2,646 + $2,090 + $750 = $5,486 (plus property)

Statute references

• Personal income tax 4% flat (trigger-based) — KRS §141.020 (HB 8 of 2022)
• Pension income exclusion $31,110 — KRS §141.019(1)(j)
• Sales tax 6% — KRS §139.200
• Economic nexus (Wayfair) — KRS §139.340
• Corporate income tax 5% — KRS §141.040
• Limited Liability Entity Tax — KRS §141.0401
• Inheritance tax (Class B/C) — KRS §140.080

Related pages

• State Tax Comparison →
• Multi-State Allocation →
• Self-Employment Tax →