Does Kentucky Tax Tips in 2026? The Fixed-Date Cutoff
Kentucky lowered its income tax rate to 4% for 2026, the latest step in a multi-year plan to reduce the state's tax burden. But when tipped workers look at their state return, they will find that the federal OBBBA tips deduction worth up to $25,000 is nowhere to be found. The reason is a single date in the state tax code: December 31, 2024.
Kentucky's December 31, 2024 cutoff
Kentucky's income tax law (KRS 141.010) conforms to the Internal Revenue Code as of December 31, 2024. This fixed-date approach means that Kentucky recognizes every federal tax provision that existed as of that date but ignores anything enacted afterward. The OBBBA was signed into law in July 2025, roughly seven months after Kentucky's conformity cutoff.
Because the OBBBA falls outside the window, the tips deduction (IRC Section 224), the overtime deduction (IRC Section 225), and the senior bonus deduction all have no effect on Kentucky income tax. Workers who claim these deductions on their federal return must still report the full income on their Kentucky return.
How fixed-date conformity works
States generally use one of three approaches to follow the federal tax code: rolling conformity (automatic adoption of all IRC changes), fixed-date conformity (adoption only up to a specific date), and selective conformity (adopting specific provisions individually). Kentucky uses the fixed-date approach.
Under this system, the Kentucky Department of Revenue applies federal definitions and rules that were in effect as of the conformity date. Kentucky starts its income tax calculation from federal adjusted gross income (AGI) and then applies Kentucky modifications. When the OBBBA reduced federal AGI through the tips deduction, that reduction was based on IRC Section 224, a provision that did not exist on December 31, 2024. So Kentucky ignores it and computes state tax as if the deduction does not exist.
The 2026 Kentucky withholding formula (Form 42A003, published October 2025) makes no mention of any tips or overtime deduction, confirming the Department of Revenue's position.
Worked example: KY restaurant worker
Scenario: A single filer in Kentucky earns $40,000 in base wages and $18,000 in qualified tips during 2026. Total income: $58,000.
Federal return:
Gross income: $58,000
Standard deduction: -$16,100
Tips deduction (Schedule 1-A): -$18,000
Federal taxable income: $23,900
Federal tax savings from tips deduction: approximately $2,160
Kentucky return:
KY adjusted gross income: $58,000
KY standard deduction: -$3,360
KY taxable income: $54,640
Tips deduction: $0 (not recognized under KY conformity date)
KY tax at 4%: approximately $1,912
The worker saves $2,160 on the federal return. On the Kentucky return, the full $18,000 in tips is taxed at the flat 4% rate, contributing approximately $630 to the state bill. Kentucky's low flat rate keeps the state-level cost modest compared to high-tax states like New Jersey, but the deduction gap still means KY workers get no state-level relief.
What it would take for KY to conform
For Kentucky to recognize the OBBBA tips deduction, the Kentucky General Assembly would need to pass legislation updating the IRC conformity date to a point on or after July 2025, when the OBBBA was enacted. Alternatively, the legislature could pass a standalone bill creating a Kentucky-specific tips deduction.
As of 2026, neither approach has been enacted. The legislature's focus has been on the broader income tax rate reduction plan, which brought the rate from 4.5% (2023) to 4% (2026). Whether tips deduction conformity will be addressed in a future session remains an open question.
It is worth noting that even at the current 4% rate, the per-dollar cost of non-conformity is relatively low compared to states with higher rates. A worker with $25,000 in tips pays $875 in KY tax on that income. In New Jersey, the same income could face rates as high as 10.75%.
Practical steps for KY workers
- Claim the federal deduction. The federal savings are significant. At the 12% federal bracket, deducting $18,000 in tips saves $2,160.
- Use the correct W-2 code. In 2026, your employer should report qualified tips using W-2 Box 12 Code TP. Confirm this matches your tip records.
- Review KY withholding. Because your federal AGI will be lower (after the tips deduction) but your KY starting income will not reflect that reduction, check whether your withholding is properly calibrated for both returns.
- Track legislative developments. The Kentucky General Assembly could update the conformity date in a future session. Watch for bills referencing KRS 141.010 or OBBBA conformity.
For a comparison of conformity approaches across all 50 states, see our state tips and overtime taxes map. You can also estimate your full Kentucky take-home pay with the Kentucky paycheck calculator.