Does Kentucky tax tips and overtime?

The federal deduction and the Kentucky deduction are separate questions. Here is where Kentucky actually lands, and why.

How Kentucky builds its tax base

Kentucky starts from your federal adjusted gross income. Both deductions are below-the-line — they reduce federal taxable income but leave AGI untouched — so neither reaches this state's return automatically. Anything you get here had to be legislated separately.

Tips in Kentucky

Still taxed

Kentucky Form 740 page 1 line 5 is federal adjusted gross income, so IRC 224 (below the line) never flows through, and Kentucky uses STATIC conformity under KRS 141.010(21). For TY2025 the conformity date was Dec. 31, 2024 (set by HB 775, 2025 session) — before OBBBA. The DOR's 2025 individual instruction packets are explicit: 'Recent federal income tax changes were enacted after Kentucky's conformity date set forth in KRS 141.010(21). As a result, these federal changes do not apply to Kentucky returns. Items such as qualified tips, overtime income, and car loan interest are not deductible on the Kentucky return.' The Federal/Kentucky differences chart lists line 30 'Qualified Tips — Federal: May be Deductible / Kentucky: Nondeductible.' For TY2026 forward, HB 757 (2026 Reg. Sess., enacted over the Governor's veto) advanced the conformity date to Dec. 31, 2025 but affirmatively DECOUPLED from the OBBBA deductions for qualified tips, overtime and vehicle loan interest — so the answer stays no. A separate bill creating standalone state exclusions (HB 26) was not enacted.

Source: Kentucky Department of Revenue, 2025 Form 740-NP instruction packet, '2025 Federal/Kentucky Individual Income Tax Differences' line 30 and 'What's New — Federal Tax Law Changes' · last reviewed August 24, 2026

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Overtime in Kentucky

Still taxed

Same statutory path and same result. The DOR's 2025 differences chart, line 31, reads 'Overtime Income — Federal: May be Deductible / Kentucky: Nondeductible,' and the What's New note names overtime income among the federal changes that 'do not apply to Kentucky returns' because they postdate the Dec. 31, 2024 conformity date in KRS 141.010(21). HB 757 (2026) then moved the conformity date to Dec. 31, 2025 while expressly decoupling from the OBBBA deductions for qualified tips, overtime pay and vehicle loan interest (along with IRC 174A and the OBBBA 163(j) amendments), so no deduction is available for TY2026 either. Kentucky is therefore a state where legislators looked at both provisions and said no twice.

Source: Kentucky Department of Revenue, 2025 Form 740-NP instruction packet (line 31, Overtime Income — Nondeductible); Dean Dorton, 'Kentucky's 2026 Legislative Session Brings Income and Sales Tax Changes' (HB 757 decoupling) · last reviewed August 24, 2026

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Kentucky overtime that does not qualify federally

Kentucky DOES have a state-only overtime mandate with no federal counterpart: KRS 337.050 requires time-and-a-half for time worked on the seventh day of a workweek when the employer permits the employee to work all seven days (subject to statutory exceptions; the seventh-day premium may be credited toward overtime otherwise due after 40 hours, and the section does not apply where the employee is not permitted to exceed 40 hours in the week). Kentucky also carries its own over-40 overtime requirement in KRS 337.285 reaching some employers outside FLSA coverage. Premium pay owed only under these state provisions is not overtime 'required under section 7 of the FLSA' and so is not qualified overtime under IRC 225 — currently academic for state purposes, since Kentucky allows no deduction at all, but it does reduce the FEDERAL deduction available to a Kentucky worker whose seventh-day premium falls in a sub-40-hour week.

Whatever your state does, your payroll taxes do not change

Both deductions reduce income tax only. Social Security and Medicare are still charged on the same wages, in every state.

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