Top 5 Overlooked Tax Deductions for Kentucky Residents

December 23, 2025

Here in the Bluegrass State, we’re proud of our unique traditions. We also have a unique tax code that offers plenty of opportunities to save—if you know where to look.

As we get closer to tax season, most people focus on their federal returns, but Kentuckians have a second, equally important return to file. Many taxpayers leave money on the table simply because they don’t realize that Kentucky’s rules are different from the federal government’s.

Are you one of them? Here are the top five overlooked tax deductions and credits that every Kentucky resident should know about.

1. You Can Itemize on Your Kentucky Return (Even if You Don’t on Your Federal)

This is the single most overlooked strategy for Kentucky taxpayers.

The federal standard deduction is so high that most people no longer itemize on their federal Form 1040. Because of this, they assume they can’t itemize on their state return either. This is a costly mistake.

Here’s Why: Kentucky has its own standard deduction, which is only $3,160 for 2024 tax filers.
The Opportunity: It is very common for a Kentucky taxpayer’s itemized deductions (like mortgage interest, property taxes, and charitable giving) to be less than the high federal standard deduction but more than Kentucky’s $3,160 standard deduction.
Your Action Plan: Don’t just assume you can’t itemize. Add up your medical expenses (above the federal 7.5% AGI floor), state and local taxes, home mortgage interest, and charitable contributions. If the total is more than $3,160, you should be itemizing on your Kentucky return.

2. Kentucky’s Generous Retirement Income Exclusion

Kentucky is a very friendly state for retirees. The state allows you to exclude a significant portion of your retirement income from your state income taxes.

The Deduction: For 2024, Kentucky residents can exclude up to $31,110 of their income from pensions, 401(k)s, IRAs, and other qualified retirement plans.
Who Qualifies: This exclusion applies to any retirement income you receive. There are also special, often more generous, rules for federal, state, and local government pensions from service performed before January 1, 1998.
Your Action Plan: If you are retired, don’t assume all your pension or 401(k) withdrawals are fully taxable on your Kentucky return. We can help you apply this valuable exclusion.

3. Social Security Benefits are Fully Exempt in Kentucky

This is another huge benefit for retirees in the Bluegrass State that often gets missed by new residents.

The Rule: While the federal government may tax a portion of your Social Security benefits (depending on your other income), Kentucky does not.
The Opportunity: Your Social Security income is completely exempt from Kentucky’s state income tax. This is a simple but powerful benefit that saves Kentucky seniors money every single year.

4. The Kentucky Child & Dependent Care Credit

If you pay for childcare, you likely know about the federal Child and Dependent Care Credit. But did you know Kentucky offers its own version, too?

The Credit: Kentucky offers a nonrefundable credit equal to 20% of your federal Child and Dependent Care Credit.
How It Works: This isn’t a deduction; it’s a credit, which is even better. A credit reduces your tax bill dollar-for-dollar. This 20% “bonus” credit from Kentucky is available to you in addition to the credit you claim on your federal return.
Your Action Plan: If you paid for daycare, after-school programs, or summer camps so you could work, make sure you’re not leaving this valuable state credit on the table.

5. Out-of-Pocket Charitable Contributions

This is a frequently missed deduction that can help get you over the $3,160 Kentucky standard deduction. Most people remember to deduct the big check they wrote to their church or a non-profit, but they forget all the small things that add up.

What Counts: Did you buy ingredients for a bake sale, casserole, or soup kitchen? Did you buy stamps for a school fundraiser? Did you buy uniforms or supplies for your volunteer work? These are all deductible.
The Big One: Mileage. Did you drive your car for charitable work? Whether you were delivering meals, visiting a hospital, or attending a non-profit board meeting, you can deduct that mileage. The rate for 2024 was 14 cents per mile.
Your Action Plan: Keep a log of your charitable mileage and receipts for all out-of-pocket expenses. They may not seem like much on their own, but when added to your other itemized deductions, they can easily push you past the standard deduction.

Don't Navigate Kentucky's Tax Code Alone

The tax rules, especially at the state level, are complex. The team at Bluegrass Accounting & Tax Solutions specializes in both federal and Kentucky tax law. We’re here to make sure you’re not just filing, but filing in the most advantageous way possible.

Frequently Asked Questions

Can I really itemize on my state return but not my federal?

Yes. This is one of the most common and important tax strategies for Kentucky residents. The state and federal tax systems are separate, and Kentucky’s standard deduction is much lower ($3,160) than the federal standard deduction, making it easier to benefit from itemizing.

I'm in the Kentucky National Guard. Are there any special credits?

Yes! Members of the Kentucky National Guard can claim a $20 nonrefundable tax credit. Note that this credit is not available for members of the military reserve.

Is there a tax break for being over 65 in Kentucky?

Yes. In addition to the retirement income exclusions, Kentucky offers a $40 personal tax credit for each individual who is age 65 or over, and another $40 credit if you are legally blind.

Does Kentucky have a version of the federal education credits?

Yes. Kentucky offers an Education Tuition Tax Credit equal to 25% of the federal American Opportunity and Lifetime Learning Credits, with certain limitations. This can be a valuable credit for students or parents paying for undergraduate tuition.