Kentucky Cuts Its Income Tax Rate to 3.50% for 2026

The reduction took effect January 1, saving $50 for every $10,000 of Kentucky taxable income before credits.

By: John Napoletano

Published: January 2, 2026

Kentucky's individual income tax rate is now 3.50%, down from 4.00% in 2025. The reduction took effect January 1 under House Bill 1, which Governor Andy Beshear signed February 6, 2025. Kentucky keeps its flat-rate system, applying one state rate to taxable income rather than moving taxpayers through higher brackets as income rises.

The Kentucky Department of Revenue (DOR) includes the new rate in its 2026 withholding formula. That gives employers the calculation to use for state income tax withheld from employee paychecks in the new year.

How Much Does the Lower Rate Save?

The rate falls by 0.50 percentage points, saving $50 for every $10,000 of Kentucky taxable income before credits. At the same taxable income, that is a 12.5% reduction in the state tax calculated before credits.

A single filer with $80,000 of Kentucky taxable income saves $400 for the year from the rate cut alone. At $160,000 of taxable income, the saving is $800. Both examples hold taxable income constant and exclude tax credits.

These amounts are taxable income after Kentucky adjustments and deductions, not gross salary. Changes in income, deductions, or credits can make a taxpayer's actual year-to-year savings different from these examples.

The New Rate Also Applies to Withholding

The Kentucky Department of Revenue's 2026 withholding formula uses the lower 3.50% rate and a higher $3,360 standard deduction. Employers use annualized wages and the number of pay periods to calculate the state tax withheld from each paycheck. The amount withheld is a payment toward the final state income tax calculated on the annual return.

Lower state withholding allows employees to receive the rate-cut benefit in their paychecks throughout 2026, rather than waiting to recover excess withholding when they file their income tax return in 2027.

Which Tax Year Uses the New Rate?

The new rate applies to taxable years beginning on or after January 1, 2026. Calendar-year taxpayers will generally file their 2026 returns in 2027. Taxpayers estimating their 2026 Kentucky income tax should use 3.50% when calculating the current year's tax.

Our Kentucky income tax rate page explains the state calculation and provides worked examples. For available Form 740 returns and instructions, visit our Kentucky income tax forms page and select the edition for the tax year you are filing.

Income Tax News Legislation 2026