The Kentucky legislature approved, and sent to Governor Andy Beshear, a bill that would update the state's Internal Revenue Code (IRC) conformity date. In February, the governor signed into law a bill to reduce the state's individual income tax rate.

IRC conformity

On March 14, 2025, the Kentucky legislature passed, and sent to the governor, House Bill 775 (HB 775). Provisions of HB 775, among other changes, would update Kentucky's date of conformity to the IRC to the IRC in effect on December 31, 2024 (from December 31, 2023).¹ This change would apply to tax years beginning on or after January 1, 2025.

This update would exclude any IRC amendments made subsequent to that date, unless the amendments extend provisions in effect on December 31, 2024, that would otherwise terminate.

Individual income tax rate reduction

On February 6, 2025, Governor Beshear signed House Bill 1, which reduces the Kentucky individual income tax rate from 4% to 3.5%, effective for tax years beginning on or after January 1, 2026. The individual income tax rate may be reduced in subsequent years if fiscal conditions are met. Under current law, the rate reduction would be 0.5%. Provisions of HB 775, however, would modify the income tax reduction process and allow for reductions ranging from 0.1% up to 0.5%, depending on which tax rate reduction condition is met.

The corporate income tax rate remains at 5%.

Implications

Governor Beshear is expected to approve the IRC conformity update. Kentucky also continues with its efforts to lower individual income tax rates, which started in 2022 when the legislature implemented an annual rate-reduction evaluation with rates being reduced if certain fiscal conditions were met. (See Tax Alert 2022-0564.) HB 775 would modify the rate reduction process.