LEXINGTON, Ky. (WKYT) — Kentucky residents will notice major changes when filing their 2026 tax returns, including a lower state income tax rate and significant new federal deductions.
The state income tax rate dropped from 4% to 3.5% this year, saving taxpayers about $5 for every $1,000 in wages, according to CPA Dana Overall.
On the federal side, new tax provisions are creating what Overall calls the biggest changes she has seen in nearly 40 years of practice. The updates require more detailed filing to ensure taxpayers don’t miss eligible deductions.
Among the largest changes, the first $12,500 of tip income is now excluded from federal income tax, or $25,000 for married couples filing jointly. The same exclusion applies to overtime pay. Previously, both were fully taxable.
Additional federal benefits include a deduction of up to $10,000 for car loan interest and an increase in the child tax credit from $2,000 to $2,200 per qualifying child.
Seniors also stand to gain. Two new deductions of $6,000 per person allow individuals 65 and older to exclude up to $12,000 in additional income from federal taxes.
With the sweeping changes, tax professionals recommend seeking guidance to maximize savings and ensure accurate filing.
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