Does Vermont Tax Pensions and Retirement Income?
See how Vermont taxes retirement income. A state-specific tax credit for eligible retirees and other exemptions can lower or even eliminate your tax bill.
Vermont does tax most forms of pension and other retirement income. This taxation, however, is not absolute, as many retirees can significantly reduce or even eliminate their state tax liability. The state provides a specific tax credit designed to lessen the tax burden on its retired residents.
How Vermont Taxes Pensions and Retirement Income
Vermont’s personal income tax system is directly linked to the federal tax system, using the federal Adjusted Gross Income (AGI) as its starting point. This means that if your retirement income is considered taxable on your federal return, it is also initially taxable in Vermont. This applies to a wide range of retirement funds, including distributions from private company pensions, government pensions, 401(k)s, and traditional IRAs.
The state applies a progressive tax structure, with rates ranging from 3.35% to 8.75%, depending on your total taxable income. Therefore, the amount of tax owed on your retirement distributions is determined by which tax bracket your income falls into after all deductions and exemptions are applied.
Vermont’s Tax Credit for Eligible Retirees
To offset the taxation of retirement income, Vermont provides exemptions for Social Security and a tax credit for other retirement income. For Social Security benefits, married couples filing jointly receive a full exemption if their Adjusted Gross Income (AGI) is $65,000 or less. A partial exemption is available for their AGIs between $65,000 and $75,000. For all other filing statuses, the full exemption applies to an AGI up to $50,000, with a partial exemption for AGIs between $50,000 and $60,000.
Beyond Social Security, the state also provides a credit for other types of retirement income. This credit is 24% of the federal credit for the elderly and disabled. To claim this benefit, taxpayers must complete and file Schedule IN-112, Vermont Tax Adjustments and Credits, with their state income tax return.
For example, consider a married couple with an AGI below the state’s threshold. If they qualify for a federal credit for the elderly and disabled, they can then calculate the Vermont-specific credit. This credit directly reduces their Vermont tax liability dollar-for-dollar, potentially lowering their overall tax bill significantly.
Special Rules for Other Retirement Benefits
Certain types of retirement income receive special tax treatment in Vermont. The state offers a $10,000 exemption on military retirement pay for eligible retirees, though this benefit is subject to income limitations.
Similarly, benefits received under the federal Railroad Retirement Act are fully exempt from Vermont income tax. This applies to both Tier 1 and Tier 2 railroad retirement benefits.