Kentucky does not tax most pension income, but the rules depend on when you were born and what kind of pension you receive

Kentucky exempts most pension and retirement income from state income tax, which is one of the most generous pension tax treatments in the country. However, the exemption is not automatic for everyone, and it does not explore equally to all types of retirement income. If you receive a pension from a Kentucky public employee system, a federal pension, a military pension, or an Individual Retirement Account (IRA), you may owe nothing — but you need to understand which category you fall into and whether you must report it on your Kentucky tax return.

The key distinction is between earned pensions (money you or your employer set aside during your working years) and unearned income like interest or dividends. Kentucky taxes the second category but not the first. This guide explains what that means for your specific situation and what you need to report to the state.

Key Takeaways

  • Kentucky does not tax pension income from Kentucky public employee retirement systems, federal pensions, military pensions, or IRAs and Roth IRAs, regardless of your age.
  • You must still report pension income on your Kentucky tax return (Form 740) even though it is not taxed, so the state can verify your exemption.
  • If you receive a pension from a private employer or an out-of-state public system, Kentucky may tax it unless you were born before January 1, 1951.
  • Social Security benefits are not taxed by Kentucky, but other retirement income like annuities or rental income from property may be.
  • Your pension payer should send you a Form 1099-R showing how much you received; use this to complete your Kentucky return accurately.

Which pensions Kentucky does not tax

Kentucky law exempts income from the Kentucky Employees Retirement System (KERS), the Kentucky Teachers Retirement System (KTRS), the State Police Retirement System, and other public employee systems in Kentucky. If you worked for a Kentucky city, county, school district, or state agency and receive a pension from that employer's retirement plan, you owe no Kentucky income tax on that money.

Federal pensions — including those from the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS) — are also exempt. Military pensions from the U.S. Department of Defense are exempt as well. Distributions from IRAs, Roth IRAs, SEP-IRAs, and straightforward IRAs are exempt regardless of your age or when you opened the account.

Even though these pensions are not taxed, you must still report them on your Kentucky Form 740 tax return. The state uses this information to confirm that you meet the exemption criteria. Failing to report a pension you received can trigger an audit, even if you ultimately owe no tax.

Pensions that may be taxed unless you meet the age requirement

If you receive a pension from a private employer — such as a corporate pension plan or a union pension — Kentucky may tax it. The same applies if you receive a pension from a public employee system in another state. However, Kentucky offers a pension exclusion for people born before January 1, 1951: if you were born in 1950 or earlier, you can exclude up to $41,110 of pension income per year (as of the 2024 tax year; this amount changes annually).

This age-based exclusion is separate from the blanket exemption for Kentucky public pensions. It exists because Kentucky grandfathered in older retirees when it changed its pension tax laws. If you were born after 1950, private pensions and out-of-state public pensions are taxable income in Kentucky unless you fall into one of the other exempt categories.

To claim this exclusion, you report your pension income on your Kentucky return and then subtract the allowed amount. Your pension payer will send you a Form 1099-R showing the total you received; you use that figure to calculate your taxable portion.

Social Security and other retirement income

Social Security benefits are not taxed by Kentucky, regardless of your age or income level. This is true even if your Social Security is partially taxable at the federal level. You do not need to report Social Security on your Kentucky return.

However, other types of retirement income are taxable. If you receive income from an annuity purchased with after-tax money, interest from savings accounts, dividends from investments, or rental income from property, Kentucky taxes that money. The exemption applies only to pensions and retirement account distributions, not to investment income or passive income you earn in retirement.

How to report pension income on your Kentucky tax return

You report pension income on Form 740, the Kentucky Individual Income Tax Return. The form has a specific line for pension and retirement income. You will need the Form 1099-R that your pension payer sends you by January 31 each year; this shows the total amount you received in the previous year.

If your pension is exempt (Kentucky public, federal, military, or IRA), you enter the full amount on the pension line, then claim the exemption on the same form. Kentucky's instructions will direct you to a worksheet or a separate schedule where you subtract the exempt amount. If your pension is potentially taxable (private or out-of-state public), you enter it and then subtract only the amount you are allowed to exclude if you were born before 1951.

You must file a Kentucky return if you had any Kentucky source income during the year, even if all of it is exempt from tax. Filing ensures that the state has a record of your exemption and reduces the chance of a notice or audit later.

What happens if you do not report your pension

If you receive a pension and do not report it on your Kentucky return, the state may send you a notice asking why. Your pension payer reports the distribution to both you and the Kentucky Department of Revenue, so the state knows the money was paid. Even if the pension is fully exempt, failing to report it can trigger correspondence and may delay any refund you are owed.

If you owe tax on part of your pension (for example, because you were born after 1950 and receive a private pension), not reporting it is considered tax evasion. Kentucky can assess penalties and interest on the unpaid tax, plus pursue collection action. The safest approach is to report all pension income and then claim the exemption or exclusion you are may have access to to.

Frequently Asked Questions

Do I have to file a Kentucky tax return if all my income is from an exempt pension?

Yes. Kentucky requires you to file a return if you had any Kentucky source income during the year, even if all of it is exempt from tax. Filing protects you by creating an official record of your exemption. Your pension payer reports the distribution to the state, so not filing can trigger a notice.

I worked for the federal government and receive a FERS pension. Is it taxed in Kentucky?

No. Federal pensions including FERS and CSRS are exempt from Kentucky income tax. You must still report the income on your Form 740, but you will claim the exemption and owe no tax.

I was born in 1952 and receive a pension from a private company. Do I owe Kentucky tax?

Yes, unless your pension falls into another exempt category. The age-based exclusion applies only to people born before January 1, 1951. You will report the pension income on your return and pay tax on the full amount unless you also receive income from a Kentucky public system, federal pension, military pension, or IRA.

My pension payer sent me a Form 1099-R. What do I do with it?

Use the Form 1099-R to complete your Kentucky Form 740. The form shows the total amount you received. Enter that amount on the pension line of your return, then follow the instructions to claim any exemption or exclusion you may have access to for. Keep the 1099-R with your tax records.

Does Kentucky tax my IRA withdrawals?

No. Distributions from traditional IRAs, Roth IRAs, SEP-IRAs, and straightforward IRAs are exempt from Kentucky income tax. You must report the withdrawal on your return, but you will claim the exemption and owe no state tax.