Vermont Non-Resident Income Tax Rate: What You Need to Know

Vermont taxes nonresidents on income earned within the state, including wages, business profits, and rental income. If you live elsewhere but have financial ties to Vermont, understanding your tax obligations is essential.

This article breaks down Vermont’s nonresident income tax, covering taxable income, tax rates, and how multistate earnings are handled.

Nonresidency Criteria

Vermont classifies you as a nonresident if you do not maintain a permanent home in the state and spend fewer than 183 days there in a tax year. Exceeding this threshold may result in classification as a resident, subjecting all income to Vermont tax.

Domicile also influences residency status. Even if you spend most of the year elsewhere, Vermont may still consider you a resident if it remains your primary home and you have not established domicile elsewhere. Factors such as voter registration, driver’s license issuance, and financial account locations can affect this determination.

Owning property in Vermont does not automatically make you a resident. However, maintaining a home available for year-round use, combined with other ties like business ownership or family connections, may prompt scrutiny. If challenged, the burden of proof is on you to demonstrate nonresidency.

Income Subject to Vermont Tax

Nonresidents must pay Vermont tax on income earned from in-state sources, including wages, business income, rental income, and capital gains from Vermont real estate.

Wages earned while physically working in Vermont are taxable, regardless of where your employer is based. A New Hampshire resident commuting to Burlington for work, for example, must pay Vermont income tax on their salary. Independent contractors performing services in Vermont are also subject to state tax, even if their business is based elsewhere.

Business income is taxable if derived from Vermont operations, affecting sole proprietorships, partnerships, and S corporations conducting activities in the state. A Massachusetts-based consultant working in Vermont must report that portion of their income.

Rental income from Vermont properties is taxable, even if the owner lives elsewhere. A New York resident renting out a vacation home in Stowe must report that income to Vermont tax authorities.

Capital gains from selling Vermont real estate are also subject to tax. The state requires withholding on such sales to ensure tax collection at the time of transfer unless an exemption applies.

Rate Structure for Nonresidents

Vermont applies a progressive income tax system, with rates ranging from 3.35% to 8.75% in 2024. Nonresidents are taxed only on Vermont-sourced income.

First, Vermont calculates tax as if the individual were a full-year resident, applying standard brackets to total taxable income. The final tax bill is then prorated based on the percentage of income earned in Vermont. For example, if a taxpayer earns $100,000 in total income but only $40,000 is from Vermont, the tax is first computed on $100,000, and then 40% of that amount is assessed.

Deductions and exemptions are also prorated. If a taxpayer qualifies for a $12,000 standard deduction but only 30% of their income is Vermont-sourced, they can claim just $3,600 of that deduction.

Allocation of Multistate Income

Vermont taxes only the portion of multistate income attributable to in-state activities. The state uses apportionment methods based on sales, payroll, or property factors to determine taxable income.

Service-based income is sourced based on where the work is performed. A consultant working remotely from New York for Vermont clients does not have Vermont-source income unless they physically perform services in the state. For businesses selling tangible goods, income is attributed based on where the product is delivered. A retailer with a Vermont warehouse that ships products nationwide must allocate a portion of its income to Vermont.

Credits for Taxes Paid to Other States

Nonresidents who pay taxes to their home state on Vermont-source income may qualify for a credit to prevent double taxation. Vermont allows a credit for taxes paid to another state, but only up to the amount of Vermont tax owed on the same income.

For example, if a Massachusetts resident earns $50,000 from Vermont employment and pays $2,500 in Massachusetts state tax on that income, but Vermont’s tax on the same earnings is $2,000, the credit is capped at $2,000. To claim this credit, taxpayers must provide documentation, such as a copy of the other state’s tax return and proof of payment.

Vermont does not have reciprocal agreements with neighboring states, meaning individuals working in Vermont while residing elsewhere must file tax returns in both jurisdictions and claim applicable credits.

Filing Requirements

Nonresidents with Vermont-source income must file a state tax return if their earnings exceed the filing threshold. Vermont follows federal adjusted gross income (AGI) guidelines, so if you are required to file a federal return and have Vermont income, you likely need to file a state return as well.

Nonresidents must complete Form IN-111, Vermont’s individual income tax return, along with Schedule IN-113, which allocates income between Vermont and other states. If a Vermont employer withheld more tax than owed, a refund may be available. Conversely, those with untaxed Vermont income, such as rental or business earnings, may owe additional tax.

Estimated tax payments are required if a nonresident expects to owe more than $500 in Vermont tax. Quarterly payments are due in April, June, September, and January to avoid penalties.

Failure to file or underreporting Vermont-source income can result in penalties and interest charges. The state imposes a late filing penalty of 5% per month, up to 25%, plus interest on unpaid balances. Underpayment penalties for estimated taxes are also assessed based on the shortfall amount and the number of days late. Nonresidents should ensure they meet all filing and payment deadlines to avoid additional costs and potential audits.