Retire to the Bluegrass State: Maximize your savings with Kentucky’s low taxes and affordable living
Kentucky is an appealing retirement destination, offering tax benefits such as exempt Social Security benefits, up to $31,110 in exclusions for qualifying pension and retirement income per person, a flat income tax rate of 3.5, and a cost of living below the national average.
By Wesley Botto, CPA/PFS, CFP
The Bluegrass State can be an appealing destination for retirees, offering a mix of affordable living, beautiful landscapes, and tax policies that may benefit retirement budgets – including an exemption for Social Security income and a low flat state income tax rate. Depending on your situation, though, there are still important considerations, such as how Kentucky treats investment income and its inheritance tax for certain beneficiaries.
An affordable place to live
Kentucky is commonly cited as having an overall cost of living below the U.S. average. One 2026 estimate places Kentucky’s cost of living about 7% lower than the national average, with an estimated monthly budget around $2,302 for a single person and $5,068 for a family of four (figures vary meaningfully by city and household).
Housing is often a key driver of affordability for retirees. As of late February 2026, Zillow estimated the typical Kentucky home value at about $228,840, though values vary widely by region and neighborhood.
Personal income tax for retirees in Kentucky
Kentucky uses a flat individual income tax. Legislation enacted in 2025 reduced the flat rate from 4.0% to 3.5% for taxable years beginning on or after January 1, 2026. In addition to the state income tax, some cities and counties impose local occupational license taxes on wages and/or net profits, depending on the jurisdiction.
Kentucky has favorable treatment of retirement income
Retirees who depend on Social Security as a major source of income may find Kentucky attractive, because Kentucky does not tax Social Security benefits.
In addition, Kentucky provides an exclusion for other types of retirement income. There is an exclusion of up to $31,110 per taxpayer for qualifying retirement income (for example, pensions and distributions from certain retirement plans), with additional specialized rules for certain government and railroad retirement benefits. Amounts above the applicable exclusion are generally taxed at Kentucky’s flat rate.
Other investment income, such as dividends, interest, and capital gains (outside of tax-advantaged retirement accounts), is generally included in taxable income and taxed at the same flat rate.
Sales and Property Taxes
Kentucky’s sales and property tax structure can help retirees keep living costs manageable and help make retirement savings go further.
Kentucky’s sales and use tax is imposed at a statewide rate of 6%, and municipalities are not permitted to add local sales taxes on top of that rate. Kentucky also provides exemptions for certain purchases; for example, many food and food ingredients purchased for home consumption are treated differently than prepared foods, candy, soft drinks, dietary supplements, and similar items. Prescription drugs are also commonly cited as exempt.
Homeowners in Kentucky often benefit from relatively low property taxes compared with many states, although rates vary by county, city, and taxing district. One 2026 county-by-county compilation reports an average effective property tax rate around 0.73%, with meaningful variation across the Commonwealth. Eligible homeowners who are age 65 or older (or who meet certain disability criteria) may claim Kentucky’s homestead exemption. For the 2025–2026 assessment years, the homestead exemption amount is $49,100, applied against the assessed value of the home.
Estate and Inheritance Taxes
Although Kentucky no longer imposes a state estate tax, it does impose an inheritance tax for certain beneficiaries. The tax rate depends primarily on the relationship between the decedent and the beneficiary, with closer relationships generally receiving larger exemptions and/or more favorable treatment.
Recent changes and clarifications are worth noting. Kentucky legislation expanded the Class A category to include foster children for decedents dying on or after July 1, 2025. In addition, effective July 15, 2024, Kentucky narrowed its inheritance tax treatment of trust property subject to powers of appointment by limiting the relevant statute to general powers of appointment, excluding certain limited or special powers.
Kentucky: Affordable living and tax benefits
Kentucky can be a compelling retirement destination, combining affordability with tax features such as the Social Security exemption, a retirement income exclusion framework, and a flat 3.5% individual income tax rate beginning in 2026. With a statewide 6% sales tax (no local add-ons) and generally moderate property taxes — plus a $49,100 homestead exemption for eligible homeowners in the 2025–2026 assessment years — many retirees can stretch their savings. That said, retirees should still consider the inheritance tax (for non-exempt beneficiaries), potential long-term care costs, and locality-specific occupational taxes when evaluating a move.
Professional resources
Working with a financial professional can provide invaluable assistance in optimizing your retirement plan to take full advantage of your state’s tax benefits while ensuring your overall financial health. You can find a licensed professional here. To find a licensed professional in Kentucky, click here.
About the author
Wesley Botto, CPA/PFS, CFP®, is a Financial Planner at Hillcrest Financial Group in Cincinnati, Ohio. He is also a member of the American Institute of CPA’s (AICPA) PFP Champions task force.
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser.