Kentucky Income Tax Decrease: 3.5% Rate and Future Cuts

The Kentucky income tax rate is 3.5% for tax years beginning on or after January 1, 2026, down from 4% in 2024 and 2025.1Justia Law. Kentucky Revised Statutes 141.020 The reduction was enacted by House Bill 1 during the 2025 legislative session after the state hit the revenue benchmarks built into Kentucky law.2Kentucky Legislative Research Commission. House Bill 1 (2025 Session) Any further cut is not automatic. It depends on the state continuing to meet those benchmarks and the General Assembly passing another bill to lower the rate.

Which Rate Applies to Which Year

Kentucky uses a single flat rate on individual income, and that rate has stepped down several times in recent years. If you’re filing a return, amending an older one, or checking your withholding, use the rate for the year the income was earned:

The framework behind these cuts came from House Bill 8 in 2022, which originally envisioned reductions happening automatically when revenue conditions were met. Later legislation changed that, so each step down now requires the General Assembly to vote.4Kentucky Legislative Research Commission. House Bill 8 Favorable numbers alone don’t lower the rate. A bill has to pass.

What 3.5% Means for Your Paycheck

For most Kentuckians, the rate change shows up first in state withholding. The Department of Revenue publishes a 2026 withholding formula that applies 3.5% to taxable wages after the standard deduction is subtracted.5Kentucky Department of Revenue. 2026 Kentucky Withholding Tax Formula Employers are expected to apply the updated tables beginning with the first payroll of the calendar year.6Kentucky Department of Revenue. Employer Payroll Withholding

Check an early 2026 pay stub. If the Kentucky withholding line is still being calculated at 4%, your employer hasn’t switched over yet. You’ll get the excess back at tax time, but it’s your money sitting with the state in the meantime, and the fix is usually a quick call to your payroll department.

Standard Deduction and Estimated Payments

Before the 3.5% rate is applied, Kentucky lets you subtract a standard deduction from your adjusted gross income. For 2026, that deduction is $3,360.7Kentucky Department of Revenue. Kentucky DOR Announces 2026 Standard Deduction The Department of Revenue adjusts this figure each year under KRS 141.081. Income below that threshold effectively faces no state income tax.

If you’re self-employed or have substantial income that isn’t subject to withholding, your quarterly estimated payments on Form 740-ES need to reflect the new rate. Kentucky generally requires estimated payments when you expect to owe at least $500 after withholding and refundable credits, and when your withholding won’t cover at least 90% of the current year’s tax or 100% of last year’s. Running your 2026 projection at 4% will overshoot. Running an older year at 3.5% will come up short.

Local Taxes Don’t Change With the State Rate

The 3.5% figure is the state rate only. Many Kentucky cities and counties, including Louisville and Lexington, impose a separate occupational license tax on wages earned within their borders, typically as a flat percentage of gross earnings. A cut to the state rate has no effect on those local rates. If you’re estimating your full Kentucky tax burden, add the local tax on top.

Will the Rate Drop Again?

Possibly, but nothing is scheduled. KRS 141.020 sets up a two-part test that must be satisfied in the same fiscal year before the legislature can consider another cut. First, the Budget Reserve Trust Fund, Kentucky’s rainy day fund, has to hold a balance equal to at least 10% of general fund revenue for that fiscal year. Second, general fund revenue has to exceed appropriations by enough of a surplus to absorb a rate reduction, with a larger surplus permitting a 0.5 percentage point cut and a smaller one permitting 0.25.1Justia Law. Kentucky Revised Statutes 141.020

The Office of State Budget Director reviews the numbers after each fiscal year closes and reports to the Interim Joint Committee on Appropriations and Revenue by September 5. If the conditions are met, the General Assembly can act to lower the rate for the taxable year starting roughly 16 months later. A fiscal year 2025–2026 review due by September 5, 2026, for example, could support a reduction effective January 1, 2028.1Justia Law. Kentucky Revised Statutes 141.020 If the conditions aren’t met, or the legislature declines to act, the rate stays where it is.

The long-term direction behind the framework is further reduction, with eventual elimination as the stated aspiration. A recession, weaker revenue, or a change in legislative priorities could stall or reverse the trend. For planning purposes, use the rate that has actually been enacted. For 2026, that’s 3.5%, and anything beyond that should be treated as uncertain until a bill is signed.