Kentucky Tax Law

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Few things in life are certain, but taxes are the definition of a constant that every Kentucky resident will face. When a person runs into trouble with their taxes or has questions about their liability under the state’s tax laws, they may be unsure about whom to turn to for help.

If you need help with your legal taxes, you can reach out to an experienced accountant or legal professional to guide you through the process.

The agency responsible for taxes in the state is the Kentucky Department of Revenue. Taxes can be filed online, by mail, or in person. The agency’s website allows users to check on the status of their tax refunds, access numerous tax-related forms, make tax payments, and file tax returns. Site visitors may also register their business within the state and seek the requisite licenses or permits.

Kentucky Income Tax Rates

Kentucky has a flat, statewide income tax rate of 5%. However, cities and counties may levy their own income taxes, as well.

Kentucky residents are taxed on all income that they earn, regardless of the geography from which it derives, whereas non-residents who earn an income in Kentucky are only taxed on the income they earn within the state.

In addition, Kentucky has reciprocal agreements with a handful of states, including Indiana, Maryland, Michigan, Ohio, and Virginia, which allows individuals who work in Kentucky but live in these states to exclusively be taxed in their state of residence, rather than requiring them to pay income taxes in Kentucky, as well. If an individual works in Kentucky and lives in a state that does not have a reciprocal agreement with Kentucky, they must file and pay taxes as a non-resident.

Kentucky exempts all retirement income from taxation. Income from public pensions, military pensions, and some private pensions are not taxed by the state. However, Social Security benefits may be taxable in Kentucky because the state considers them to be ordinary income. In addition, any disability or workers’ compensation benefits that a taxpayer receives may also be taxable, depending on how they are categorized by the Internal Revenue Service. Benefits that individuals receive from unemployment compensation are also taxable in the state, but only 50% of any federal unemployment benefits that might be taxed will be deducted from a recipient’s state taxable income.

Kentucky does not exempt any other form of income, such as interest or capital gains, from taxation.

Property Tax and Rent Rebate Program

According to the KY Department of Revenue, the amount that a property owner is required to pay in property taxes each year largely depends on two factors:

  1. The property’s assessed value: The assessed value is the basis for the amount of tax that a property owner has to pay to local government. County officials usually determine the assessed value of real estate, raw land, and personal property by considering either the property’s market value or appraised (fair) cash value, whichever is higher. Revenue from taxes imposed on the assessed value of real estate, which is also known as real property, accounts for a substantial portion of local government revenue in the state.
  2. State and local tax rates: As of October 2021, the state property tax rate in Kentucky is 12.2 cents per $100 of assessed value. The state sets this rate annually by July 1, and it applies to all real property that incurs tax in Kentucky. With regard to local tax rates, the county governing body sets the effective date of the tax rate and establishes procedures for levying taxes. Every county and municipality has its own rates to charge for taxes on property located within its borders; however, no county or municipality may exceed 20% more than the state property tax rate without prior voter consent. Unless a taxing district specifies otherwise, the property tax becomes due by December 31 every year.

At this time, Kentucky does not provide a tax rebate program for renters.

Kentucky Sales and Use Taxes

The Kentucky Sales and Use Tax is 6%, and there are no local taxes relating to sales and use within the state.

The state imposes sales tax on the gross receipts derived from:

  • Retail sales of tangible personal property
  • Retail sales of digital property
  • Sales of certain services within Kentucky

The state imposes a use tax on the purchase price of tangible personal property or digital property bought for storage, use, or consumption within Kentucky. It generally applies to property purchased outside Kentucky but designated for use within the state.

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