Kentucky does not tax most pension income, but the rules depend on when you started receiving it and what type of pension you have

Kentucky excludes most private and public pensions from state income tax. If you receive a pension from a Kentucky employer, a federal employer, or a military pension, you generally pay no Kentucky state income tax on that money. The main exception is if you retired before a specific date — pensions earned before January 1, 1998, are fully excluded, while pensions earned after that date may be taxed depending on your total income and filing status.

The state also does not tax military pensions, federal pensions, or railroad retirement benefits. However, if you have other income sources — such as wages, interest, or distributions from retirement accounts like IRAs or 401(k)s — those are still taxable in Kentucky. The pension exclusion applies only to the pension itself, not to your overall income.

Key Takeaways

  • Pensions from Kentucky employers and public retirement systems are generally not subject to Kentucky state income tax.
  • Military pensions and federal employee pensions are also excluded from Kentucky taxation.
  • If you retired before January 1, 1998, your entire pension is excluded; if after, the exclusion may be limited based on income thresholds.
  • Other retirement income such as Social Security, IRA distributions, and 401(k) withdrawals follow different tax rules and may be taxable.
  • You still file a Kentucky tax return if you have other income, even if your pension is not taxed.

Pensions earned before and after January 1, 1998

Kentucky law treats pensions differently based on when you became may be able to access to receive them. If you were may be able to access to receive your pension before January 1, 1998, the entire amount is excluded from Kentucky income tax, regardless of how much you earn from other sources.

If you became may be able to access after January 1, 1998, the exclusion is limited. You can exclude up to $41,110 per year (as of the 2024 tax year, though this amount adjusts annually). This means if your pension is $50,000 per year, only $41,110 is excluded and the remaining $8,890 is subject to Kentucky income tax. The threshold amount changes each year based on inflation adjustments, so you should check the current year's limit on the Kentucky Department of Revenue website or your tax form instructions.

Which pensions are covered and which are not

Kentucky excludes pensions from the Kentucky Employees' Retirement System (KERS), the Kentucky Teachers' Retirement System (KTRS), the State Police Retirement System, and most other public employee pension plans. Private pensions from employers in Kentucky are also excluded. Military pensions, federal civil service pensions, and railroad retirement benefits receive the same treatment.

Distributions from IRAs, 401(k) plans, 403(b) plans, and similar retirement accounts are not considered pensions for this purpose and are taxed as ordinary income in Kentucky. If you withdraw money from an IRA or 401(k) before age 59½, you may also owe a federal penalty, though Kentucky does not add a state penalty. Roth IRA distributions follow different rules — may have access to distributions are not taxed, but non-may have access to distributions may be.

How to report your pension on your Kentucky tax return

You report pension income on Form 740, Kentucky Individual Income Tax Return. If your pension is fully excluded, you may still need to file if you have other income that pushes you above the filing threshold. The filing threshold depends on your age and filing status; for example, a single person under 65 must file if their income exceeds $2,700 (as of 2024).

On the return, you list your total pension income and then claim the exclusion. If you became may be able to access before January 1, 1998, you subtract the entire pension amount. If you became may be able to access after that date, you subtract only the annual limit (currently $41,110). The difference, if any, is taxable income. You will also receive a Form 1099-R from your pension provider showing the gross amount paid to you during the year.

Social Security and other retirement income

Social Security benefits are not taxed by Kentucky, even though they may be taxed at the federal level depending on your total income. This is separate from the pension exclusion — you can receive both a pension and Social Security without either being taxed by the state.

However, if you have a job and earn wages while receiving a pension, those wages are fully taxable in Kentucky. Interest income, dividend income, and capital gains are also taxed. If you are receiving distributions from an IRA or 401(k) in addition to a pension, only the pension portion is excluded; the retirement account distributions are taxed as regular income.

What to do if you are unsure about your pension type

Contact your pension provider or the plan administrator directly and ask whether your pension qualifies for Kentucky's exclusion. They can tell you the exact date you became may be able to access to receive benefits, which determines whether the full exclusion or the annual limit applies. You can also contact the Kentucky Department of Revenue at (502) 564-4581 or visit their website for guidance on your specific situation.

If you receive a pension from an employer outside Kentucky, the same rules apply — Kentucky taxes based on the type of pension and your may be able to access date, not on where the employer is located. Federal pensions and military pensions are always excluded, regardless of when you became may be able to access.

Frequently Asked Questions

Do I have to file a Kentucky tax return if I only have pension income?

Only if your pension is not fully excluded and the taxable portion exceeds the filing threshold for your age and filing status. If your entire pension is excluded and you have no other income, you do not have to file. However, if you have other income such as wages or interest, you must file even if your pension is excluded.

What if I worked in Kentucky but my pension is from another state?

Kentucky taxes based on the type of pension and your may be able to access date, not on where you worked. If your out-of-state pension qualifies under Kentucky law (for example, if you became may be able to access before January 1, 1998), it is excluded from Kentucky taxation. Contact the Kentucky Department of Revenue if you are unsure whether your specific pension qualifies.

Does Kentucky tax my 401(k) withdrawals?

Yes. Withdrawals from 401(k) plans, IRAs, and similar retirement accounts are taxed as ordinary income in Kentucky. These are not considered pensions and do not receive the pension exclusion, even if you are retired. The pension exclusion applies only to income from formal pension plans.

Can I claim the pension exclusion if I moved to Kentucky after I retired?

Yes. Kentucky taxes based on whether you are a resident during the tax year, not on where you were when you retired. If you moved to Kentucky and became a resident, you can claim the pension exclusion on your Kentucky return as long as your pension meets the other requirements.

What happens if my pension income changes year to year?

If your pension fluctuates, you apply the annual exclusion limit to whatever amount you receive that year. If you receive $35,000 one year and $45,000 the next, the exclusion applies to each year separately. Keep your Form 1099-R from your pension provider each year to verify the amount reported.