Explaining Vermont Taxes for Retirees

Vermont’s tax system presents several considerations for retirees. The state levies an income tax that includes certain retirement benefits, a property tax to fund education and local services, and an estate tax on high-value estates. These tax categories contain specific rules, exemptions, and credits that can influence a retiree’s financial planning.

Taxation of Retirement Income

Vermont taxes federally taxable Social Security benefits but provides an exemption based on the taxpayer’s adjusted gross income (AGI). For married couples filing jointly, benefits are fully exempt if their AGI is $65,000 or less, with the exemption phasing out for an AGI up to $75,000. For all other filing statuses, the full exemption applies to an AGI up to $50,000, with a phase-out for incomes up to $60,000.

Distributions from private retirement accounts, such as traditional 401(k)s and IRAs, are included in Vermont’s taxable income and taxed at ordinary rates. Most pension and annuity income is also subject to state income tax. However, Vermont offers specific exclusions for certain types of retirement pay.

The state provides an exclusion for up to $10,000 of military retirement income, provided the retiree’s AGI falls below the thresholds for the Social Security exemption. A similar $10,000 exclusion is available for retirement income from certain civil service and other government pension systems not covered by Social Security. A taxpayer may only claim one of these retirement income exemptions.

Vermont Income Tax Rates and Deductions

Vermont uses a progressive income tax system where rates increase with income. For the 2024 tax year, marginal rates range from 3.35% to 8.75%. The income thresholds for these brackets depend on the taxpayer’s filing status. Taxable income is determined by taking federal adjusted gross income and applying Vermont-specific deductions and exemptions.

Retirees can choose between the state’s standard deduction or itemizing deductions. Taxpayers who are age 65 or older, or who are blind, are entitled to an additional $1,200 deduction. This can provide direct tax savings for many senior households.

Itemizing deductions may be more advantageous for those with substantial qualifying expenses. Vermont allows taxpayers to deduct certain expenses, such as medical costs, in a manner similar to federal rules. This can result in a lower state tax liability compared to taking the standard deduction.

Key Tax Credits for Retirees

Vermont offers tax credits that can directly reduce the income tax a retiree owes. The Property Tax Credit provides relief to homeowners and renters based on their income and property tax paid. To qualify, an individual must file a Homestead Declaration, have been domiciled in Vermont for the entire previous calendar year, and have a household income below $115,000 for the 2024 tax year. The credit offsets property taxes that exceed a certain percentage of household income, with a maximum credit of $8,000.

Homeowners apply the credit against their property tax bill, while renters receive a refundable credit based on the portion of their rent considered to be for property taxes. The program requires an annual application through the Vermont tax system, ensuring the benefit is targeted to those who meet the income and residency requirements.

Property and Sales Taxes

Property taxes in Vermont are a primary source of funding for public education and are administered through a dual system. Property owners pay a statewide education property tax set at the state level. In addition, owners pay a local municipal property tax, with rates determined by towns and cities to fund services like roads and police. Property tax bills are a combination of both state and local rates.

Vermont levies a statewide sales tax of 6%, with some localities permitted to add a small additional tax. This combined rate is applied to the sale of most goods and some services.

A feature of Vermont’s sales tax is the exemption of many essential goods. Groceries, prescription and over-the-counter drugs, and clothing are exempt from the state sales tax. These exemptions help lower household expenses for retirees.

Vermont Estate Tax

Vermont imposes its own estate tax, which operates independently of the federal estate tax. This tax is levied on the total value of a deceased person’s taxable estate. The tax only applies to estates that exceed a specific exclusion amount.

For 2024, the Vermont estate tax exemption is $5 million. If the value of an estate is $5 million or less, no Vermont estate tax is due. Only the value of an estate that exceeds this threshold is subject to taxation.

The tax is calculated at a flat rate of 16% on the portion of the estate’s value above the exemption amount. For example, if an estate is valued at $6 million, the tax would be applied to the $1 million that is over the exemption.