Kentucky 2026 Tax Changes — What Residents & Business Owners Must Know
Beginning January 1, 2026, major federal tax changes go into effect as prior TCJA provisions expire and updated federal rules continue.
Kentucky residents — who pay a flat state income tax — will feel these changes significantly because Kentucky’s tax system starts with federal AGI.
These Changes Impact:
- W-2 earners in Louisville, Lexington, Bowling Green, Owensboro, Covington
- Agricultural and rural households
- Small business owners, contractors, and LLC/S-Corp operators
- Healthcare workers, teachers, and state employees
- Real estate investors, landlords, and STR operators
- Families with children
- Retirees drawing taxable income
- Dual-income households
This guide explains exactly how 2026 tax changes will affect Kentucky taxpayers.
Key Federal Changes Affecting Kentucky in 2026
Standard Deduction Shrinks
Many Kentucky households — especially families, homeowners, and retirees — will see higher federal taxable income beginning in 2026.
Since Kentucky uses federal AGI as its starting point, this also increases Kentucky state taxable income.
Federal Tax Brackets Increase Significantly
- dual-income families
- manufacturing and logistics workers
- healthcare professionals
- educators and state employees
- households earning between $60K–$250K
Kentucky residents will feel these combined federal and state impacts strongly.
QBI (20% Business Deduction) Remains Federal; Kentucky Does Not Match It
QBI continues at the federal level but Kentucky does not apply the 20% deduction for state income tax.
- Federal taxable income may drop for business owners
- Kentucky taxable income does not
- Planning is needed to balance federal vs state systems
- contractors and trades
- LLC and S-Corp owners
- self-employed professionals
- real estate agents
- small manufacturers
- agricultural businesses
Child Tax Credit Shrinks
- decreases from about $2,000 to around $1,000 per child
- loses some refundability
This affects many families in Louisville, Lexington, Bowling Green, and rural counties across the state.
Marriage Penalty Returns
Kentucky has a large population of dual-income households.
- joint filers move into higher federal brackets faster
- combined incomes push families over phaseout thresholds
- credits shrink sooner
Couples earning $75K–$200K combined will feel this adjustment most.
Kentucky-Specific Tax Considerations
1. Kentucky State Tax Uses Federal AGI as the Starting Point
- higher federal taxable income
- lower federal deductions
- reduced credits
…all lead to higher Kentucky state taxable income.
- employees
- business owners
- retirees
- rental property owners
2. Real Estate Owners & Rental Investors Will Be Affected
- Louisville
- Lexington
- Bowling Green
- Northern Kentucky (Cincinnati metro)
2026 impacts include:
- capital gains
- depreciation changes
- rental loss rules
- STR participation requirements
- timing of selling property
Kentucky’s rising home values mean more residents will face capital gains or rental income considerations.
3. Agriculture & Rural Households Must Plan Ahead
- farm income
- livestock sales
- crop revenue
- equipment depreciation
- Schedule F deductions
2026 changes to brackets, deductions, and depreciation rules have a direct effect on farm families.
4. Retirement Planning Still Influenced by Federal Rules
Kentucky exempts some retirement income, but federal changes affect:
- IRA withdrawals
- 401(k) distributions
- pension income
- RMDs
- Roth conversion timing
Higher federal brackets increase the tax cost of withdrawals.
Who Is Hit Hardest in Kentucky (2026)
- Dual-income households
- Homeowners and families
- Business owners and contractors
- Farmers and agricultural operators
- Real estate investors and landlords
- STR owners
- Retirees with taxable retirement income
- Middle-income earners
What Kentucky Residents Should Do Before December 31, 2025
- Review federal and state withholding
- Maximize retirement contributions before bracket increases
- Evaluate Roth conversion timing
- Review business structure (LLC vs S-Corp)
- Document rental and STR activity
- Assess capital gains exposure
- Plan property or farm equipment purchases strategically
- Build a 2025–2026 tax strategy
Kentucky 2026 Tax FAQ
Does Kentucky conform to QBI?
No — QBI is federal-only.
Will Kentucky taxes increase?
Rates stay the same, but taxable income will rise due to federal changes.
Are families affected?
Yes — reduced credits and higher federal taxable income impact refunds.
Are STR owners impacted?
Yes — depreciation and rental classification rules tighten.
Are retirees affected?
Yes — federal bracket increases impact taxable retirement withdrawals.
Get a 2026 Kentucky Tax Strategy
Kentucky residents face important changes in 2026 due to reduced deductions, higher brackets, new credit rules, and shifting rules affecting business owners, farmers, homeowners, and retirees.
A personalized tax plan ensures you’re prepared before the changes take effect.