Kentucky does not tax Social Security benefits. Under KRS 141.019, the state fully excludes Social Security and Railroad Retirement Board income from your state return, no matter how much you receive or how you file.1Kentucky Legislative Research Commission. Kentucky Revised Statutes KRS 141.019 – Calculation of Adjusted Gross Income and Net Income The exclusion covers regular retirement benefits, Social Security Disability Insurance, and equivalent Railroad Retirement Board payments.
How the Exclusion Works
Your Kentucky return begins with federal adjusted gross income, which may already include a taxable portion of your benefits. KRS 141.019(1)(e) then tells you to subtract every dollar of Social Security and Railroad Retirement benefits that the federal government taxed.1Kentucky Legislative Research Commission. Kentucky Revised Statutes KRS 141.019 – Calculation of Adjusted Gross Income and Net Income
There is no income cap and no phase-out. A retiree collecting $40,000 in Social Security receives the same complete exclusion as one collecting $15,000. Whatever the federal government treated as taxable, Kentucky removes.
Claiming It on Your Kentucky Return
The subtraction happens on Kentucky Schedule M, which you attach to Form 740. On Line 10, enter the taxable Social Security and Railroad Retirement benefits shown on federal Form 1040 or 1040-SR, line 6(b).2Commonwealth of Kentucky Department of Revenue. 2025 Kentucky Individual Income Tax Forms – Instructions for Schedule M That entry pulls those benefits back out of Kentucky income before the flat rate applies.
Kentucky’s flat rate drops to 3.5% for 2026, down from 4% in 2025.3Commonwealth of Kentucky Department of Revenue. 2026 Kentucky Withholding Tax Formula Skip the Schedule M entry and that 3.5% applies to your benefits, so it’s worth confirming the number even when tax software fills it in automatically.
Federal Tax Still Applies
Kentucky leaves your benefits alone. The IRS often does not. The federal government can tax up to 85% of Social Security based on your “combined income” — roughly your adjusted gross income (excluding Social Security), plus tax-exempt interest, plus half your benefits.4Internal Revenue Service. Publication 915, Social Security and Equivalent Railroad Retirement Benefits
Two thresholds set how much becomes taxable federally:
- If combined income exceeds $25,000 (single) or $32,000 (married filing jointly), up to half your benefits may be taxed.
- If combined income exceeds $34,000 (single) or $44,000 (joint), up to 85% may be taxed.
These thresholds have never been adjusted for inflation, so more retirees cross them each year.5Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable Whatever the IRS taxes flows onto line 6(b) of your 1040, and that is exactly the figure Kentucky then removes on Schedule M.
What About Pensions, 401(k)s, and IRAs?
Other retirement income does not get the same free pass. Kentucky excludes up to $31,110 per person in distributions from pensions, annuities, 401(k) plans, IRAs, and similar accounts.1Kentucky Legislative Research Commission. Kentucky Revised Statutes KRS 141.019 – Calculation of Adjusted Gross Income and Net Income Each spouse calculates the exclusion separately, so a married couple can shield up to $62,220 in combined distributions. Anything above the cap is taxed at 3.5%.
The retirement exclusion goes on Line 9 of Schedule M. If distributions total $31,110 or less, enter that amount. If they exceed the cap and include a federal, state, or local government pension, you complete Schedule P to figure the exact exclusion.2Commonwealth of Kentucky Department of Revenue. 2025 Kentucky Individual Income Tax Forms – Instructions for Schedule M
HB 183, considered during the 2026 legislative session, would raise the retirement exclusion to $41,110, but only for tax years beginning on or after January 1, 2027. For 2026, the cap stays at $31,110.