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HB 183

AN ACT relating to the taxation of retirement distributions.

2026 Regular Session Introduced by Daniel Elliott and 2 co-sponsors

Kentucky HB 183 increases the retirement-distribution exclusion from AGI, setting specific yearly maximums (31,110 through 2026, then 41,110 from 2027) to reduce state taxable inco

to Appropriations & Revenue (H)
#retirementandpensions #taxation #income--individual
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Bill Summary · HB 183

Purpose of the bill

HB 183 (2026 Session, Kentucky) amends Kentucky tax law to modify how retirement distributions and related income are treated for individual taxpayers (non-corporate). The core aim is to adjust allowable exclusions and deductions in the calculation of Kentucky adjusted gross income (AGI) and net income, with specific changes to retirement distributions and certain other income items.

Key provisions and changes

  • Section 1: Revisions to KRS 141.019 (calculation of AGI for individuals)
    • General framework remains: AGI is the gross income minus the standard itemized deductions per the Internal Revenue Code (IRC) as modified by Kentucky law.
    • Specific adjustments and exclusions (items to exclude or include) are enumerated, including:
    • (a) Exclude income exempt from state taxation by Kentucky and U.S. law.
    • (b) Exclude certain railroad retirement benefits that are subject to federal tax under Public Law 89-699.
    • (c) Include interest from obligations of sister states and their subdivisions.
    • (d) Exclude employee pension contributions (pickup contributions) that IRS/federal courts have ruled are not gross income until distributed or available to employee (various Kentucky references listed).
    • (e) Exclude Social Security and railroad retirement benefits that are subject to federal tax.
    • (f) Exclude any settlement or judgment damages for Agent Orange exposure related to Vietnam War service.
    • (g) Retirement distributions exclusions:
      • For years after 2005 but before 2018: exclude up to $41,110 of total distributions from retirement plans.
      • For years 2018 through 2026: exclude up to $31,110.
      • For years beginning in 2027 onward: exclude up to $41,110.
      • Definitions provided for “annuity contract,” “distributions,” and “pension plans, profit-sharing plans, retirement plans, or employee savings plans.”
    • (h) Exclude certain income from S corporation shareholders related to franchise/capital stock taxes, including qualified subchapter S subsidiaries, and align shareholder basis with federal tax basis.
    • (i) Exclude compensation for precinct election workers.
    • (j) Exclude capital gains from eminent domain.
    • (k) Exclude all income from all sources for military members on active duty who are killed in the line of duty (year of death and prior year), including death benefits to estates/beneficiaries.
    • (l) Exclude all military pay while on active duty.
    • (m) Include depreciation deductions under federal tax rules; exclude amounts allowed for depreciation under Kentucky law.
    • (n) Include the deduction for qualified business income under 26 U.S.C. sec. 199A.
    • (o) Ignore changes in cost basis of surviving spouse’s share in Kentucky community property trusts for federal purposes due to a spouse’s death.
    • (p) Allow treatment related to forgiven loans under certain COVID-era relief provisions (Pub. L. 116-260, secs. 276 and 278) for tax years ending between March 27, 2020 and January 1, 2022.
    • (q) Allow the same treatment as provided by restaurant revitalization grants under specific federal provisions for tax years ending between Jan 1, 2020 and March 11, 2023, including deductions and attributes associated with those grants.
    • (2) Net income computation:
    • Net income is AGI minus most deductions allowed by IRC, as modified by Kentucky law, with specified exceptions:
      • (a) Deduction for state and local taxes (IRC 164) is allowed.
      • (b) Net operating loss deduction (IRC 165) is allowed except wagering losses (IRC 165(d)).
      • (c) Medical expense deductions (IRC 213) allowed.
      • (d) Moving expenses (IRC 217) allowed.
      • (e) Miscellaneous deductions (IRC 67) allowed.
      • (f) Deductions for certain estate-related tax attributes (KRS 140.090(1)(h)) must be disclosed if claimed.
      • (g) Personal exemptions under IRC 151 are allowed.
      • (h) Deductions for club/organization dues limited by civil rights-related restrictions, with carve-outs for religious/charitable/educational groups that restrict membership by religion or denomination.
      • (i) Election to take the Kentucky standard deduction (KRS 141.081) instead of itemizing under federal rules as modified by this section.

Who is affected

  • Individual taxpayers in Kentucky who file Form 1040-like returns for state income tax purposes (non-corporate filers).
  • Taxpayers receiving retirement distributions, pensions, annuities, and related benefits, given the newly specified exclusions (notably the recurring retirement distribution exclusion and its changing dollar thresholds).
  • S-corporation shareholders, particularly regarding the exclusion of certain distributive income related to franchise/capital stock taxes and basis rules for shares.
  • Certain military personnel and veterans’ families receive expanded exclusions for active-duty/military death benefits and pay.
  • Taxpayers with specific deductions (e.g., state and local taxes, medical expenses, moving expenses, 199A deductions) will see alignment with the revised net income calculation.

Procedural and timeline aspects

  • Effective timing for the retirement distribution exclusions:
    • 2018–2026: $31,110 maximum exclusion per year.
    • 2027 onward: $41,110 maximum exclusion per year.
  • Several provisions reference cross-references to federal tax code sections (IRC) and Kentucky statutes, indicating ongoing alignment with federal tax law and Kentucky-specific editorial changes.
  • Legislative action history:
    • Introduced in the Kentucky House on January 7, 2026.
    • Referred to Appropriations & Revenue on January 14, 2026 (H committee action noted).
  • As an “unofficial copy,” the text reflects committee or editorial drafting prior to final passage; final enacted language could differ slightly in numbering or phrasing.

Potential impact

  • Increases or clarifies the amount of retirement-distribution income that can be excluded from Kentucky AGI, potentially reducing state tax liability for retirees.
  • Adjusts diversity of deductions available at the net income stage, with emphasis on retirement income, military benefits, and S-corporation income.
  • Maintains flexibility for taxpayers to elect either standard deduction or itemized deductions, with specific carve-outs and alignments to federal rules.
  • Could affect revenue projections for the state budget and influence planning for tax year 2026 and beyond, especially given the staged exclusion thresholds through 2027.

Compiled from official sources — confirm details with the bill’s official record.

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