Yes, Kentucky does tax pensions, but most retirees owe far less than the headline rate suggests. The state applies a flat 3.5% income tax for 2026, and each person can subtract up to $31,110 of qualifying retirement income before that rate touches a dollar.1Department of Revenue. 2026 Kentucky Withholding Tax Formula2Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.019 Social Security, Railroad Retirement, and VA disability payments are exempt on top of that. What you actually owe comes down to the type of retirement income you receive, when you earned any government service credit, and whether you claim the right exclusions on your Kentucky return.
The $31,110 Retirement Income Exclusion
This is the single most valuable break for Kentucky retirees. You can subtract up to $31,110 per person from your state taxable income for qualifying retirement distributions.2Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.019 If you and your spouse both receive qualifying income and file jointly, each of you claims your own exclusion, sheltering up to $62,220 combined.3Kentucky Department of Revenue. Schedule P (2025) The exclusions are individual; if one spouse has $20,000 in qualifying income and the other has $40,000, the first excludes $20,000 and the second excludes $31,110, leaving $8,890 taxable. Unused exclusion does not transfer.
Qualifying income covers distributions from just about any written retirement plan: traditional pensions, 401(k)s, 403(b)s, profit-sharing plans, annuity contracts, IRAs, and deferred compensation arrangements. Lump-sum distributions count as well, and Kentucky does not treat them differently from periodic payments.2Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.019
If your total qualifying retirement income falls below $31,110, the entire amount is state-tax-free and you don’t need to file Schedule P. Only the portion above the threshold gets taxed at 3.5%. A retiree receiving $45,000 in pension income would pay Kentucky tax on just $13,890, or roughly $486.
Roth IRA distributions generally don’t factor in at all. Qualified Roth withdrawals aren’t included in federal adjusted gross income, so they never reach the Kentucky return and no exclusion is needed.
Retirement Income That Is Fully Exempt
Several categories are completely exempt with no dollar cap, and they don’t count against your $31,110 exclusion. That preserves the exclusion for other retirement income you might receive.
- Social Security benefits. Kentucky excludes all Social Security benefits that are taxable at the federal level, and the subtraction happens on your state return.2Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.019
- Railroad Retirement benefits. Both Tier 1 and supplemental Tier 2 benefits are fully exempt.3Kentucky Department of Revenue. Schedule P (2025)
- VA disability compensation. Veterans’ disability payments aren’t in federal gross income to begin with, so they never appear on your Kentucky return.
Kentucky fully exempts Social Security, but the federal government may still tax up to 85% of your benefits if your combined income (adjusted gross income plus tax-exempt interest plus half your Social Security) exceeds $25,000 for single filers or $32,000 for joint filers.4Social Security Administration. Must I Pay Taxes on Social Security Benefits? Many Kentucky retirees owe zero state tax on Social Security and still owe federal tax on part of it.
Government and Military Pensions With Pre-1998 Service
Federal, Kentucky state, Kentucky local, and military retirees get a larger break tied to a January 1, 1998 dividing line.
State and Local Government Pensions
Benefits from the Kentucky Employees Retirement System, County Employees Retirement System, or Kentucky Teachers’ Retirement System split into two pieces. The portion of your pension attributable to service credit earned before January 1, 1998 is completely exempt from Kentucky income tax with no cap.5Kentucky Public Pensions Authority. Taxes and Your Responsibilities The portion tied to service after that date is taxable but eligible for the $31,110 exclusion.6Teachers’ Retirement System Kentucky. Tax Information
Say you worked for the state from 1989 through 2016, for 27 years total. Nine of those years fall before the cutoff, and the pension income tied to them is fully exempt. The remaining 18 years go through the $31,110 exclusion. If your annual pension is $36,000, roughly $12,000 is exempt outright and the remaining $24,000 is covered by the exclusion, so you’d owe zero Kentucky tax on the entire pension.5Kentucky Public Pensions Authority. Taxes and Your Responsibilities
The same January 1, 1998 rule applies to federal government pensions received by Kentucky residents. Retirement credit for unused sick leave counts as earned at the time of retirement, not when the sick leave originally accrued.
Military Retirement Pay
If you retired from the U.S. Armed Forces before January 1, 1998, your entire military pension is exempt from Kentucky income tax.7U.S. Army Benefits. Kentucky State Military and Veterans Benefit Highlights and Eligibility If you retired after that date, the pension is treated like any other qualifying retirement income and subject to the $31,110 exclusion.8Department of Revenue. Military Exemptions
Service members with creditable service before January 1, 1998 who actually retired after that date can often exclude more than $31,110. The pre-1998 portion is fully exempt on top of the standard exclusion for the post-1997 portion. The Kentucky Department of Revenue provides a calculator to help determine your exempt percentage.9Department of Revenue. Individual Income Tax
How to Claim the Exclusion on Your Return
Kentucky starts with your federal adjusted gross income, then applies state-specific adjustments through two schedules attached to Form 740.2Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.019
Schedule P is where the real calculation happens. You need it if you receive government pension income with pre-1998 service credit, or if your total qualifying retirement income exceeds $31,110 and you want to separate the exempt portion from the taxable portion. Schedule P walks you through the pre-1998 exempt amount in Part I and the $31,110 exclusion on remaining retirement income in Part III, then combines them into a single exclusion figure.3Kentucky Department of Revenue. Schedule P (2025)
If your total qualifying retirement income is $31,110 or less and you have no pre-1998 government service, you can skip Schedule P entirely. You simply report the subtraction on Schedule M.3Kentucky Department of Revenue. Schedule P (2025)
Schedule M is where all state adjustments to federal AGI collect. Fully exempt income like Social Security and Railroad Retirement benefits gets subtracted there, along with the final exclusion amount calculated on Schedule P. The total flows to Form 740, reducing your Kentucky taxable income.9Department of Revenue. Individual Income Tax The 3.5% rate then applies to what remains after the standard deduction ($3,360 for 2026) or your itemized deductions if larger.10Department of Revenue. Kentucky DOR Announces 2026 Standard Deduction
Withholding and Estimated Tax Payments
Most pension and annuity payers withhold federal income tax automatically unless you opt out. If you receive multiple pensions, you need a separate Form W-4P on file with each payer to control your federal withholding. Under-withholding through the year can trigger an underpayment penalty at filing time.11IRS. 2026 Form W-4P
Kentucky has its own estimated tax rule. If you expect to owe $500 or more in state tax after subtracting withholding and credits, you generally need to make quarterly payments on April 15, June 15, September 15, and January 15. This catches some retirees off guard, particularly those whose pension income substantially exceeds the $31,110 exclusion and who haven’t arranged for Kentucky withholding through their plan administrator. Kentucky allows a small personal tax credit of $40 if you’re age 65 or older, which helps but won’t cover a meaningful shortfall.
Required minimum distributions, once you turn 73, count as qualifying retirement income for Kentucky purposes and go through the same $31,110 exclusion.12Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs If your RMD alone pushes you past that threshold, the excess gets taxed at 3.5%.
Kentucky Still Taxes Inherited Retirement Accounts
One boundary catches families off guard. Kentucky is one of a handful of states with an inheritance tax, and retirement accounts are not exempt from it. When a Kentucky resident dies with money in an IRA, 401(k), or pension, the beneficiary who receives that money may owe Kentucky inheritance tax based on their relationship to the deceased.
Close family members (spouses, parents, children, grandchildren, and siblings) are Class A beneficiaries and owe nothing. Leave a retirement account to a niece, nephew, son-in-law, daughter-in-law, aunt, or uncle (Class B), and the tax starts at 4% and climbs to 16% on amounts over $200,000. Friends, cousins, and other non-relatives (Class C) face rates from 6% to 16%, with the top rate kicking in at just $60,000.13Kentucky Legislative Research Commission. Kentucky Revised Statutes 140.070 – Inheritance Tax Rates The exemption amounts are small: $1,000 for Class B and $500 for Class C. Naming a qualifying charity or a Class A beneficiary avoids the tax entirely.