Updated October 5, 2026. Quick answer: Yes. Kentucky taxes trust income, and the 2025 Form 741 instructions compute the tax by “multiplying line 16 by 4% (.04)” for the 2025 tax year.
How Kentucky treats trust income
| Item | What the documents say |
|---|---|
| Treatment | Under 103 KAR 19:010, a resident estate or trust is taxed on income it keeps, not on income passed out to beneficiaries. The source says: “shall report and pay tax on all taxable income except that portion” of net income distributable or distributed during the taxable year. |
| Who counts as a resident trust | The documents read do not define a resident trust by settlor, trustee or beneficiary domicile, and the instructions separate resident from nonresident trusts only in the filing rule, which covers “every resident trust with gross income for the taxable year” of $100 or more. |
| Rate on trust income | The 2025 Form 741 instructions set one flat rate for the fiduciary tax computation. The source says: “multiplying line 16 by 4% (.04)”. The instructions print no graduated table. |
| Distribution deduction | Kentucky allows a deduction for income distributed to beneficiaries, and the instructions say that “income distributed or distributable to beneficiaries is the amount on page 1” on Form 741, which labels line 10 the income distribution deduction. |
| Nonresident trusts | Under the instructions, a return is required from a “nonresident trust with gross income for the taxable year from Kentucky” sources of $100 or more, and the regulation taxes only income from Kentucky sources. |
| Return to file | Resident and nonresident trusts above the gross income thresholds file Form 741, the “KENTUCKY FIDUCIARY INCOME TAX RETURN” due by the 15th day of the 4th month after the tax year closes. |
| Trust credit | The regulation gives each trust and estate a small credit against the tax. The source says: “A trust is allowed a tax credit of two (2) dollars” and an estate is allowed a credit of ten (10) dollars. |
| Standard deduction | Trusts do not receive the individual standard deduction. The source says: “The standard deduction permitted individuals in KRS 141.081 is not allowed” in computing taxable income of an estate or trust. |
A $10,000 example
A trust with $10,000 of taxable income that it keeps, rather than distributes, is taxed at 4%, computed as $10,000 x 4% = $400, before any deduction or exemption the state allows. Federal tax on the trust’s income still applies.
Income the trust passes out to a beneficiary is handled as the distribution deduction row above describes.
What changes in 2026
House Bill 1 of the 2025 session amends KRS 141.020 to set the income tax rate at 3.5% for taxable years beginning on or after January 1, 2026, and the Department of Revenue 2026 withholding formula lists 3.5%, but the documents read do not state how that rate is applied on Form 741.
Federal rules
The state’s treatment sits on top of the federal one. The federal brackets a trust faces are laid out in trust tax brackets versus individual brackets, and capital gains that a trust keeps are covered in capital gains stay in the trust. The IRS explains the federal return in the About Form 1041 page.
Related: how Kentucky taxes retirement income, whether Kentucky taxes pensions, what a living trust costs in Kentucky, and federal trust tax brackets.
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Answer againSources
- Instructions, Form 741 Kentucky Fiduciary Income Tax Return, 2025 (Kentucky Department of Revenue): https://revenue.ky.gov/Forms/741 Instructions (2025).pdf
- 103 KAR 19:010, Computation of income; estates and trusts (Kentucky Department of Revenue, Legislative Research Commission): https://revenue.ky.gov/DOR Training Materials/103 KAR 19.010. Computation of income; estates and trusts.pdf
- 2025 Acts Chapter 1 (HB 1), An Act relating to the individual income tax rate (Kentucky Legislative Research Commission): https://apps.legislature.ky.gov/law/acts/25RS/documents/0001.pdf
- 2026 Kentucky Withholding Tax Formula, 42A003 (Kentucky Department of Revenue): https://revenue.ky.gov/Forms/2026 Withholding Formula.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.