Kentucky’s 3.5% rate for 2026
Kentucky’s flat individual rate drops to 3.5% for tax years beginning in 2026, under HB 1 of the 2025 session. Capital gains are taxed at that same rate, so a $40,000 rise in Kentucky taxable income adds $1,400 before credits.
Kentucky follows federal treatment of most gains, including the home-sale exclusion, but it ties itself to the Internal Revenue Code as of a fixed date, so a brand-new federal break may not carry over until Kentucky updates its conformity. Kentucky also lets cities and counties levy occupational license taxes, but those apply to wages and business profits, not to an individual’s investment gains.
Kentucky has its own 2026 rate and conformity rules
Kentucky HB 1 was signed on February 6, 2025. Its enacted summary reduces the individual income-tax rate from 4% to 3.5% for tax years beginning on or after January 1, 2026. The transaction’s tax year controls the selected rate; the bill-signing year does not make the lower rate applicable to a 2025 sale.
Kentucky’s income base still needs its own return reconciliation. The department identifies a federal conformity date, so a new federal deduction or exclusion should not be assumed to carry through automatically to the state calculation. Confirm the treatment in the Kentucky instructions before reducing the state taxable-income base.
This calculator offers the 3.5% prepared-base comparison before credits. If confirmed Kentucky taxable income rises by $10,000, that mode shows a $350 increase before credits. Use entered final liabilities when state adjustments, credit changes or nonresident sourcing require the complete return. Kentucky is not interchangeable with Ohio, whose nonbusiness formula has a different threshold and rate.
The legislative history identifies the signed measure as 2025 Acts Chapter 1. Proposed amendments and earlier versions are also linked on the record page. Use the enacted version for the 2026 rate; a proposed multi-year reduction in an amendment is not the rule this worksheet applies.
Kentucky preparation checklist
- 2026 tax-year effective date under HB 1
- Kentucky adjustments and conformity treatment
- Prepared base or final-liability scope