State tax rates and rules for income, sales, property, estate, and other taxes that impact retirees. Go to Retiree Tax Map Kentucky Add to State Compare List | View List View State Compare List (0) selected | Compare up to 5 The Bottom Line Tax-Friendly The Bluegrass State exempts Social Security benefits from state income taxes, plus up to $31,110 per person of a wide variety of retirement income, including public and private pensions and annuities. A modest 6% sales tax is imposed at the state level, and localities can't add to it. Kentucky's median property tax rate is below the national average, too.What's not to like? Kentucky's inheritance tax. Income Tax Range Kentucky has a flat income tax rate of 5%. Certain counties, cities and other local government entities (such as school boards) can levy an additional occupational license payroll tax on wages earned by employees working within their boundaries. Taxation of Social Security Benefits Social Security benefits are not taxed by the state. Tax Breaks for Other Retirement Income Up to $31,110 of income from private, government, and military retirement plans (including IRAs and 401(k) plans) is exempt. However, government retirement income attributable to service credits earned before 1998 is fully exempt without limits.Railroad Retirement benefits are also exempt. Sales Tax 6% state levy. No local taxes.Groceries: ExemptClothing: TaxableMotor Vehicles: Exempt if 6% motor vehicle usage tax is paidPrescription Drugs: Exempt Real Property Taxes For homeowners 65 and older, $40,500 of the assessed value of residential property is exempt from state taxes for 2021 and 2022. Annual Car Taxes and Fees An annual vehicle property tax based on the car's value is imposed. Additional local taxes may apply. Estate and Inheritance Taxes Kentucky has an inheritance tax, but the decedent's spouse, parents, children, grandchildren, and siblings are exempt. Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren are taxed at rates ranging from 4% to 16%, depending on the value of the property inherited (the first $1,000 of property is exempt). All other heirs are taxed at rates ranging from 6% to 16% (their exemption is only for the first $500 of property).