Kentucky Tax Rates

This post provides an overview of the primary taxes levied at the state level in Kentucky. The information contained here is intended for general reference. For individuals or businesses seeking comprehensive support with tax filings, compliance, or strategic planning, indinero offers expert services. We encourage all who utilize this summary to explore the tailored tax support available through indinero.

Individual Income Tax

Kentucky operates under a flat rate individual income tax system, which has been established through recent legislative reforms aimed at gradually lowering the rate.

  • State Rate: For the 2025 tax year, the state income tax rate is a flat 4.0% of Kentucky taxable net income. The rate is scheduled to decrease to 3.5% effective January 1, 2026, provided state revenue triggers are met.
  • Retirement Income: Social Security benefits are not taxable in Kentucky. The state also provides significant exemptions for certain pension and retirement income.
  • Local Occupational Taxes: A unique feature is the widespread imposition of local occupational license taxes (or “local income taxes”) by cities and counties. These taxes are levied on an individual’s wages and/or a business’s net profits, and they are paid in addition to the state income tax, making the total income tax burden higher in certain areas.

Sales and Use Tax

Sales tax is a key revenue source for the state, with Kentucky maintaining a single, uniform state rate.

  • State Rate: The state sales tax rate is 6.0% on the retail sale of tangible personal property, digital property, and certain specified services.
  • No Local Sales Tax: Crucially, Kentucky does not allow local or county sales taxes. Therefore, the combined state and local sales tax rate is uniformly 6.0% across all jurisdictions, which is lower than the national average combined rate.
  • Exemptions: Items generally exempt from the 6.0% sales tax include prescription drugs and groceries (unprepared food).
  • Use Tax: A corresponding state use tax of 6.0% applies to taxable items purchased outside of Kentucky but stored, used, or consumed in the state if Kentucky sales tax was not collected.

Property Tax (Ad Valorem Tax)

Property taxes in Kentucky are among the lowest in the nation and are levied at both the state and local levels. The tax primarily funds local services, including public schools.

  • Assessment: Real property is assessed at 100% of its fair cash value as of January 1.
  • Tax Calculation: The tax is determined by applying the local millage rate (set by counties, cities, and school districts) to the assessed value.
  • State Rate: The state levies a separate, minimal real property tax rate that is required by law to be reduced annually if the statewide real property assessments grow by more than 4% from the previous year. This mechanism ensures the state tax on property remains low.
  • Homestead Exemption: The state provides a generous Homestead Exemption on the assessed value of an owner’s primary residence for qualifying residents who are 65 or older or disabled.

Corporate Income Tax

Kentucky imposes an income tax on C corporations and entities that elect to be taxed as C corporations.

  • Tax Rate: The corporate income tax rate is a flat 5.0% of the corporation’s Kentucky taxable net income.
  • Apportionment: For multi-state corporations, Kentucky uses a single sales factor apportionment method. This means a company’s income taxable in the state is based solely on the percentage of its total sales receipts derived from Kentucky.
  • Credit: Corporations that pay the Limited Liability Entity Tax (LLET) may claim a credit against their corporate income tax liability.

Unique Business Taxes

Kentucky imposes taxes on businesses that are levied alongside or instead of the standard income tax.

  • Limited Liability Entity Tax (LLET): This tax is imposed on all entities that offer limited liability, including C corporations, S corporations, and LLCs. It is essentially a gross receipts or gross profits tax, calculated as the lesser of:
    1. 0.095% of Kentucky gross receipts or
    2. 0.75% of Kentucky gross profits. All limited liability entities must pay a minimum LLET of $175.
  • Inheritance Tax: Kentucky is one of the few states that imposes a state inheritance tax on property received from a deceased person. The tax rate and exemption depend entirely on the recipient’s relationship to the decedent, with immediate family (Class A, including spouses, children, and parents) being fully exempt.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.