Updated October 5, 2026. Quick answer: Yes. Kentucky taxes interest and dividends at a flat rate: “For 2025, the tax rate for individual income tax is 4%.” The enacted 2025 Act sets 3.5% for taxable years beginning on or after January 1, 2026. Interest on other states’ bonds is taxed.
How Kentucky treats dividends and interest
| Item | What the documents say |
|---|---|
| Treatment | Taxed at the flat rate |
| 2025 rate | 4% |
| 2026 rate | “the tax shall be three and one-half percent (3.5%) of net income” |
| Other states’ bonds | The instructions say interest on securities issued by other states and their political subdivisions “is taxed by Kentucky and must be reported.” |
| Kentucky bonds | “Note: Interest from securities of Kentucky and its political subdivisions is exempt.” |
| Federal obligations | The instructions list interest from federal obligations as taxable on the federal return and exempt for Kentucky |
| Mutual funds | “Also report dividends received from regulated investment companies (mutual funds)” |
A $20,000 example
Taxable dividends and interest of $20,000 add $20,000 x 4% = $800 of Kentucky tax for 2025, and $20,000 x 3.5% = $700 for 2026.
What changes in 2026
The enacted 2025 Act (HB 1) lowers the rate to 3.5% for taxable years beginning on or after January 1, 2026, from 4% for 2025, and provides that it may be reduced further from 2027 under an annual budget process.
Federal rules
The state’s treatment sits on top of the federal one. Qualified dividends and ordinary dividends are sorted out on the Form 1099-DIV, as the site explains in Box 1a and 1b: ordinary versus qualified dividends, and interest is reported as covered in 1099-INT Box 1. The IRS explains the federal side in Topic no. 403, Interest Received and Topic no. 404, Dividends.
Related: whether Kentucky taxes capital gains, whether Kentucky taxes pensions, how Kentucky taxes retirement income, dividends and interest tax by state, and how tax-exempt interest is reported.
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Answer againSources
- 2025 Form 740 Packet Instructions (Kentucky Department of Revenue): https://revenue.ky.gov/Forms/740 Packet Instructions.pdf
- 2025 Regular Session Chapter 1 (HB 1), KRS 141.020 amended (Kentucky General Assembly): https://apps.legislature.ky.gov/law/acts/25RS/documents/0001.pdf
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.