Is Vermont Tax Friendly for Retirees?
A balanced look at how Vermont's tax system affects retirees. Understand the interplay between income-based rules and credits to see the full financial picture.
Determining if a state is “tax-friendly” for retirement requires a look beyond a single tax category. The total tax burden on a retiree is a combination of income, property, sales, and estate taxes. A low income tax rate might be offset by high property taxes, or generous sales tax exemptions could make daily life more affordable. For those planning their retirement in Vermont, understanding how these different taxes interact is the best way to accurately assess the financial landscape.
How Vermont Taxes Retirement Income
Vermont employs a progressive income tax system, meaning the tax rate increases as income rises. For the 2025 tax year, the state has four tax brackets with rates ranging from 3.35% to 8.75%. This structure affects retirees, as their total taxable income, which includes distributions from various retirement accounts, determines their marginal tax rate.
In Vermont, Social Security benefits are taxable, but exemptions are available based on Adjusted Gross Income (AGI). For the 2025 tax year, joint filers with an AGI of $65,000 or less can fully exempt their Social Security benefits. For most other filing statuses, the AGI threshold for a full exemption is $50,000. Partial exemptions are available for incomes slightly above these levels, phasing out completely for joint filers with an AGI of $75,000 or more and for other filers at $60,000 or more.
Distributions from private pensions and withdrawals from 401(k)s and traditional IRAs are taxed as ordinary income at the state’s progressive rates. Vermont offers targeted relief for certain retirees. Military retirement pay is eligible for an exemption of up to $10,000, provided the retiree’s income falls below the same AGI thresholds used for the Social Security exemption. A similar $10,000 exemption is available for income from certain government pensions for those not covered by Social Security, subject to the same income limits. A taxpayer can only claim one of these $10,000 exemptions.
Vermont Property Taxes for Retirees
Property taxes in Vermont are centered on a statewide education tax, which funds the state’s schools. This tax is levied on all property, but the rate paid by a homeowner depends on whether the property is declared as a homestead. The education tax rate varies by town, reflecting local school spending decisions, which means the property tax burden can differ from one community to another.
Resident homeowners must file a Homestead Declaration annually. This declaration identifies the property as the owner’s primary residence and is a prerequisite for being taxed at the lower homestead education tax rate. It is also required to access the state’s property tax credit program. Failure to file the declaration results in the property being taxed at the higher non-homestead rate.
Vermont’s Property Tax Credit program can provide relief for retirees on fixed incomes. This credit is not based on the value of the home but on household income. For the claim filed in 2025, homeowners with a household income up to $115,000 may be eligible for a credit to offset their school and municipal property taxes. The program is designed so that as income decreases, the credit amount increases, effectively capping the property tax burden for lower- and middle-income households.
Sales and Other State Taxes
Vermont imposes a 6% statewide sales tax. Some municipalities are permitted to assess an additional 1% local option tax. This local tax can apply to general sales and also to meals, alcohol, and rooms.
A key feature for retirees is the state’s extensive list of sales tax exemptions on essential goods. This policy directly lowers the cost of living, as many daily purchases are not taxed. Exempt items include:
- Groceries
- Prescription and over-the-counter drugs
- Medical equipment
- Most clothing and footwear
Retirees should be aware of other consumption taxes. Vermont applies specific taxes to certain goods and services, including taxes on gasoline, which affects transportation costs. The state also has a meals and rooms tax, levied on prepared foods in restaurants and on short-term rentals.
Vermont Estate Tax Considerations
It is important to distinguish between an estate tax and an inheritance tax. Vermont does not have an inheritance tax, which is a tax paid by individuals who receive assets from a deceased person’s estate. This means that beneficiaries will not owe a separate Vermont tax on the property they inherit.
The state does, however, impose its own estate tax, levied on the total value of a deceased person’s estate before assets are distributed. For 2025, the Vermont estate tax applies only to estates with a value exceeding $5 million. This high exemption threshold means that most estates will not be subject to this tax.
For estates that do exceed the $5 million exemption, a flat rate of 16% is applied to the value of the estate above that threshold. The significant exemption amount ensures that only the wealthiest Vermonters will face the estate tax. For those affected, it is a notable aspect of the state’s tax system that requires financial planning.