Kentucky Pension Income Exclusion for Military Retired Pay

Kentucky excludes up to $31,110 of pension and retirement income from the individual income tax. It is not a military exclusion. Every Kentucky taxpayer with pension income gets the same $31,110, and military retired pay simply falls inside it. Two numbers make this smaller than it sounds. The exclusion has been $31,110 since the 2018 tax year, when it dropped from $41,110, and it is not indexed. And Kentucky's flat rate for 2026 is 3.5 percent, with a standard deduction of $3,360. A retiree whose pay exceeds the exclusion is paying 3.5 percent on the excess, so the first dollar above $31,110 costs three and a half cents. The exclusion was worth far more when the rate was six percent. The one genuinely military-flavoured part is the pre-1998 calculation, and it is the piece most often described wrongly. The rule is not "retired before January 1, 1998, so everything is exempt." It is that the exempt share is driven by service performed before January 1, 1998. A retiree whose entire career preceded that date ends up fully exempt as a consequence. A retiree who served on both sides of the date computes an exempt percentage on Schedule P from the ratio of pre-1998 service to total service, and that percentage of the pension comes out before the $31,110 is applied. So a veteran who enlisted in 1994 and retired in 2016 is not "post-1997 and therefore capped at $31,110" - roughly a fifth of that pension is exempt on top. Mechanically: if your total pension income is $31,110 or less, subtract it on Schedule M and stop. If it is more, you must complete Schedule P to determine the taxable portion. Revenue publishes a Schedule P calculator for federal, Kentucky state, and Kentucky local government retirees who retired after December 31, 1997. Survivor annuities ride along. Survivor Benefit Plan, Reserve Component SBP, and Retired Serviceman's Family Protection Plan payments are pension income for this purpose and draw on the same $31,110, which means a surviving spouse with both an annuity and another pension shares one exclusion between them rather than getting one each. Two things sit outside this entry because Kentucky does not tax them at all and they never touch the exclusion: active duty military pay, which has its own entry, and VA disability compensation, which is not in federal adjusted gross income to begin with and so never reaches a Kentucky return. Military disability retirement pay received as a pension or annuity for personal injury or sickness resulting from active service is likewise excluded from federal taxable income, so it too arrives at Kentucky already gone. Do not spend the $31,110 on income that was never taxable. One forward-looking caution. Kentucky is on a statutory path of rate reductions and the 2026 rate of 3.5 percent is a step on it. Each cut shrinks what this exclusion is worth without changing its headline number, so the $31,110 figure will keep looking the same while meaning less.