Kentucky’s individual income tax rate will drop from 4% to 3.5% on January 1, 2026, marking the latest step in the Commonwealth’s multi-year effort to modernize its tax code and strengthen long-term economic competitiveness.
The reduction was authorized through House Bill 1, legislation passed with strong bipartisan support during the 2025 Regular Session.
Under House Bill 1, Kentucky taxpayers will collectively save an estimated $718 million annually. In addition to benefits for individuals, the legislation also provides direct relief to businesses structured as pass-through entities, such as sole proprietorships, partnerships, and S corporations, that pay taxes under the individual income tax code. The Kentucky Chamber’s “2025 Results for Business” estimates that these businesses will realize at least $97.6 million in annual savings once the rate reduction is fully implemented.
“The Kentucky business community has long championed tax reform as a catalyst for growth and competitiveness,” said Kentucky Chamber President and CEO Ashli Watts. “The current system reflects years of thoughtful work by the General Assembly, and we will continue partnering with lawmakers to advance reforms that strengthen Kentucky’s economy and position our state for long-term success.”
Ahead of the 2025 legislative session, the Kentucky Chamber’s Kentucky Chamber Center for Policy and Research released “A Guide to Kentucky Tax Reform,” outlining the state’s progress since 2018 and reinforcing the importance of continued, data-driven reform as lawmakers considered House Bill 1.
As the 2026 legislative session begins January 6, stay tuned to The Bottom Line for information on key legislation that will impact the business community.
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