Is military retirement taxed in Kentucky?

How it works in Kentucky

Start with the Pension Income Exclusion Worksheet in the 2025 Schedule M instructions. Add your taxable pensions and annuities, disability retirement and deferred compensation. If the total is $31,110 or less, all of it goes on Schedule M, line 9, and you are done. Each spouse computes a separate exclusion, so a married couple can exclude up to $31,110 each.

Above $31,110, the pre-1998 rule takes over, because the Department treats military retired pay as a federal pension. KRS 141.021 excludes federal retirement annuities and taxes only the part accruing on or after January 1, 1998, using the fraction in KRS 141.0215: years of service after January 1, 1998 over total years of service. On Schedule P, a retiree whose retirement date is before January 1, 1998 enters the whole federal pension on line 1(a) as fully exempt. A later retiree uses line 1(b) and an exempt percentage from the Schedule P worksheet: months of service credit before January 1, 1998, divided by total months.

Example with assumed figures: a $48,000 pension for 24 years of service that began in January 1994 has 48 of 288 months before 1998, an exempt percentage of 16.67%. Line 1(b) exempts $8,000. The other $40,000 moves to Part II with any IRA or 401(k) income, and line 3 excludes the lesser of that total or $31,110. Line 4 adds them: $39,110 excluded and $8,890 taxable, about $356 at the 4% rate for 2025 or $311 at 3.5% for 2026. The same pension with no pre-1998 service leaves $16,890 taxable.

You figure the exempt percentage once. The worksheet says to complete it only in the year you retire or if you have never computed it, keep it with your records, and reuse the percentage in later years. The Department also posts a Schedule P calculator for federal and Kentucky government retirees who retired after December 31, 1997.

If you stopped at $31,110 in a past year without filing Schedule P, the pre-1998 share went unclaimed. Kentucky allows a refund on an amended return filed within four years of the original due date. The rate also falls from 4% for 2025 to 3.5% for tax years beginning on or after January 1, 2026, under KRS 141.020(2)(f), and the Department's 2026 withholding formula prints that 3.5% rate.

What trips Kentucky retirees up

• The $31,110 is shared. It covers all pension and retirement income per taxpayer, not military pay alone, so IRA and 401(k) withdrawals use up the same cap as the DFAS check.
• Schedule P does nothing for service that began after 1997. The 2025 form's flowchart sends a post-1997 federal retiree to the worksheet, and with zero months before January 1, 1998 the exempt percentage is zero, leaving the $31,110 as the whole exclusion.
• Military time bought into a civilian federal or Kentucky pension is dated by when you served. The Schedule P definitions say purchased service credit "is credited based on the dates of service," while air-time, purchased credit unrelated to prior work, "is not included in total service earned after December 31, 1997, regardless of when purchased."
• No separate military retirement exclusion appears in KRS 141.019, the section that holds the $31,110 pension exclusion. As amended effective July 15, 2026, it still has no line for military retired pay alone (read October 9, 2026).