Work in Kentucky, Live in Tennessee: How the Taxes Split (2026)

The rule at the border

Which state taxes a Kentucky paycheck when you live in Tennessee?

Kentucky taxes wages earned inside Kentucky. That includes wages earned by nonresidents who commute into a Kentucky worksite from Tennessee. Kentucky maintains reciprocity agreements with a specific group of states, and Tennessee is not one of them. The Kentucky Department of Revenue lists Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin as its reciprocity partners in the Form 740-NP packet. Tennessee is not on that list.

Tennessee, on its own side, does not levy an individual income tax on salaries or wages. The Hall income tax, which once taxed interest and dividends, was repealed for tax years beginning January 1, 2021. Tennessee has no state income tax on earned income and no withholding requirement, so there is no Tennessee resident return to file for wage income. Tennessee's $400 professional privilege tax is a separate license-based tax for a short list of professions (attorneys, securities agents, broker-dealers, investment advisers and lobbyists), not a tax on wages. Federal withholding, Social Security, and Medicare still apply as usual on top of the Kentucky tax.

The short version: one state return in Kentucky, no state return in Tennessee, and no double-tax credit calculation. That is a much simpler filing profile than the two-return setup used by workers who cross into states that do impose an income tax.

Reciprocity, checked

Do Kentucky and Tennessee have a reciprocal wage agreement?

No. Kentucky and Tennessee do not share a wage reciprocity agreement. Kentucky's guidance says Kentucky has reciprocal agreements with specific states and describes them as agreements that provide for taxpayers to be taxed by their state of residence, and not the state where income is earned. The list in the Form 740-NP packet (Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin) does not include Tennessee.

Kentucky also notes that reciprocity does not apply to persons who live in Kentucky for more than 183 days during the tax year. A related residency rule matters for any commuter: someone not domiciled in Kentucky who keeps a place of abode there and spends more than 183 days of the year in Kentucky counts as a resident, though the Department of Revenue says such persons are not full-year residents and file Form 740-NP. If you keep your Tennessee home and only travel to Kentucky for work days, this is unlikely to apply.

One state, one form

Which Kentucky return and forms do you file?

You file Form 740-NP, the Kentucky Individual Income Tax Return for Nonresident or Part-Year Resident. A nonresident must file if they had any gross income from Kentucky sources and gross income from all sources above the modified gross income threshold for their family size; for 2025 that threshold is $15,650 for a family of one. On the return you complete Section B first: Column A shows your federal amounts and Column B the Kentucky-source portion, and Section A then computes the tax from your Kentucky adjusted gross income.

• Form 740-NP for the return itself, with the Kentucky-source income in Column B.
• Schedule KW-2, which you must enclose to get credit for Kentucky tax withheld.
• Federal Form 1040 and supporting schedules, which must be filed with the 740-NP.
• No Kentucky Form 740-NP-R, because that refund form is limited to full-year nonresidents from Kentucky's reciprocity states. Tennessee residents do not qualify.

Kentucky's 2026 individual income tax rate is a flat 3.5 percent of taxable income, set by statute for taxable years beginning on or after January 1, 2026. The 2026 standard deduction is $3,360, up $90 from 2025. On the 740-NP the standard deduction is claimed in full, not prorated, and subtracted from your Kentucky adjusted gross income.

The 2025 return was due April 15, 2026. If you have a federal extension, you do not need a separate Kentucky extension; otherwise Kentucky uses Form 740EXT. An extension covers filing, not payment: interest applies to tax paid after the original due date, and a late payment penalty may apply if less than 75 percent of the tax was paid by then.

Why no credit is needed

Do you claim a credit anywhere to avoid double tax?

No. Because Tennessee has no state income tax on wages, there is nothing on your side of the border to credit or refund. The usual two-state credit calculation, where a resident state taxes worldwide income and then credits tax paid to the work state, does not apply when the resident state does not tax wages in the first place. Your Kentucky tax stays where it lands.

If you also earn income from a state that does tax wages, that other state may enter the picture. For example, a Tennessee resident with a Kentucky job and a summer contract in Georgia would file Kentucky Form 740-NP for the Kentucky wages and a Georgia nonresident return for the Georgia work. Tennessee is still not in the mix. Each work state taxes only its own share, and no resident-state credit collects them together.

You do not use Kentucky Form 740-NP-R either. That short form exists only for full-year nonresidents who are residents of a reciprocity partner and want a refund of Kentucky withholding. Tennessee is not on the reciprocity list, so a Tennessee resident is not eligible. Any Kentucky withholding you paid is reconciled on 740-NP itself, not on a reciprocal-state refund form.

Withholding at the paycheck

What should your Kentucky employer withhold?

A Kentucky employer must withhold Kentucky income tax from the wages of both residents and nonresidents unless the law exempts them. The Department of Revenue says the withholding rate is 3.5% for tax year 2026, and its formula subtracts the $3,360 standard deduction from annual wages before applying the rate. You give the employer Form K-4, and you can use it to ask for extra withholding.

Because Tennessee has no state withholding on wages, only the Kentucky line will appear on your paycheck for state tax. Your W-2 should use the two-letter code KY in the state boxes with the Kentucky wages. If your employer added a Tennessee state code by mistake, ask them to correct it.

If your work is fully remote and you never physically work in Kentucky, those wages are not Kentucky-source: a nonresident is taxable only on income from labor performed or other activities in Kentucky. Ask the employer to stop Kentucky withholding on that pay and keep records of where you worked.

Worked example: Tennessee resident earning $70,000 from a Louisville employer in 2026

Single filer, all work performed in Louisville, using the Kentucky 2026 flat rate and 2026 standard deduction (claimed in full on the 740-NP). The Louisville nonresident occupational tax is withheld separately and is not creditable on the state return. At a Lexington worksite the local line would be $1,575 (2.25%), in Bowling Green $1,400 (2.0%). Approximate.

Local occupational taxes

Do Kentucky cities and counties tax your paycheck too?

Yes, often. Kentucky law lets cities, counties and school districts levy occupational license taxes on compensation for work done in their area, so the tax follows where you work, not where you live. Employers must withhold these local taxes, and the money goes to the local tax district, not to the Kentucky Department of Revenue. Local occupational tax is not claimed on the state return.

Louisville Metro charges 1.45% for nonresidents and 2.2% for residents, and employers withhold it from compensation for work performed in Louisville and Jefferson County. Lexington-Fayette charges 2.25% on an individual's compensation. Bowling Green, the Kentucky city nearest many Tennessee commuters, raised its wage withholding rate from 1.85% to 2.0% from January 1, 2024. Boone, Kenton and Campbell counties in Northern Kentucky, Warren County and many other districts are on the Kentucky Secretary of State's list of local occupational taxing districts, where each district's forms are published.

Check the specific city, county and school district where your worksite sits before finishing your budget. The state 3.5 percent rate does not include these local taxes.

Remote days and mid-year moves

How do remote days, hybrid schedules, and mid-year moves change the tax?

Kentucky taxes wages for services performed inside Kentucky. If you split your week between an in-office Kentucky workday and a home-office Tennessee workday, only the Kentucky-day wages are Kentucky-source. Keep a day log so the split at year-end is defensible. Report only the Kentucky share on Form 740-NP.

A mid-year move from Kentucky to Tennessee is handled with part-year filing on the Kentucky side. On Form 740-NP you check the part-year resident box and report both your Kentucky-resident income for the months you lived there and any Kentucky-source income earned after you moved out. Because Tennessee still has no wage return, there is nothing to file on the Tennessee side for wage income. If you moved the other direction, from Tennessee to Kentucky, you file Kentucky as a part-year resident and use the residency date on the return.

Kentucky's 183-day test matters if you keep a Tennessee home but rent a place in Kentucky. Kentucky law treats someone who keeps a place of abode in Kentucky and spends more than 183 days of the year there as a resident, which can bring all of that year's income into Kentucky tax; the Department has such persons file Form 740-NP rather than the full-year resident return. Track your Kentucky nights, and keep the Tennessee address, driver license and voter registration in place if Tennessee is where you actually live.

Fixing withholding mistakes

What if the wrong state ends up on your W-2?

One problem to watch for is a W-2 that lists Tennessee in the state boxes by mistake. Tennessee has no state tax, so no Tennessee return can absorb those wages, and Kentucky still expects its share. Ask the employer to issue a W-2c showing Kentucky and the correct Kentucky wages.

If Kentucky withheld tax for a Tennessee resident who worked entirely from Tennessee, file Kentucky Form 740-NP with no Kentucky-source wages and enclose Schedule KW-2 to claim the refund. The nonresident return is the route to get Kentucky withholding back when the work was not done inside Kentucky.

Local occupational tax withheld for work done elsewhere is refunded by the local district, not on the state return. Louisville uses Form W-1REE for employees with compensation for work outside Louisville and Jefferson County, and Lexington's refund application needs signatures from both employee and employer and is based on actual working time. Kentucky law generally allows local refund claims within two years of the return due date.