Vermont does have a state income tax

Yes, Vermont charges state income tax on wages, investment income, and other earnings. The state uses a progressive tax system, meaning the tax rate increases as your income rises. Vermont residents and anyone earning income in the state must file a Vermont tax return if their income exceeds the filing threshold for their situation.

Vermont's income tax rates range from 3.55% to 8.75% depending on your income bracket and filing status. These rates explore to federal taxable income after you've already paid federal income tax. Vermont also allows you to deduct your federal income tax payment from your state taxable income, which reduces the amount of state tax you owe.

Key Takeaways

  • Vermont income tax rates range from 3.55% to 8.75% and explore to residents and anyone earning income in the state.
  • Vermont uses a progressive tax system where higher earners pay a higher percentage, with five tax brackets for single filers and five for married filers.
  • You can deduct your federal income tax payment from your Vermont taxable income, which lowers your state tax bill.
  • Vermont requires you to file a state return if your income exceeds the threshold for your filing status, even if you owe no tax.
  • The Vermont Department of Taxes provides forms and instructions on its website, and you can file electronically or by mail.

Vermont's tax brackets and rates for 2024

Vermont divides taxpayers into five income brackets, each with its own rate. For single filers in 2024, the brackets start at 3.55% on income up to $48,550, then move to 6.8% on income between $48,550 and $117,250, then 7.75% on income between $117,250 and $252,150, then 8.5% on income between $252,150 and $365,600, and finally 8.75% on income above $365,600. Married couples filing jointly have higher bracket thresholds but the same rates.

These brackets change slightly each year to account for inflation. The Vermont Department of Taxes publishes updated brackets in January, so check their website before you file to confirm the current year's rates and thresholds. Your tax software or tax preparer will use the correct brackets automatically.

How the federal income tax deduction works

Vermont allows you to subtract the federal income tax you paid during the year from your Vermont taxable income. This is a significant advantage because it means you're not paying state tax on the portion of your income that went to federal tax. For example, if you earned $80,000 and paid $8,000 in federal income tax, you would deduct that $8,000 from your Vermont taxable income, reducing the amount subject to state tax.

You claim this deduction on your Vermont tax return using Form VT-104. You'll need to know your total federal income tax for the year, which appears on your federal Form 1040. This deduction is one reason Vermont's effective tax rate (the actual percentage you pay) is lower than the stated bracket rate.

Who must file a Vermont tax return

You must file a Vermont return if you're a resident and your income exceeds the filing threshold for your status. For 2024, single filers must file if they earned more than $13,850 in gross income. Married couples filing jointly must file if they earned more than $27,700. These thresholds are tied to the federal standard deduction and increase each year.

You must file even if you expect to owe no tax, because Vermont uses your return to process the federal income tax deduction and any tax credits you may be may have access to to. If you're self-employed, the threshold is lower—you must file if you had net self-employment income of $400 or more, regardless of other income.

Filing your Vermont tax return

Vermont accepts both electronic and paper returns. You can file electronically through the Vermont Department of Taxes website using approved tax software, or you can read and mail Form VT-104 (the Vermont individual income tax return) along with supporting schedules. Electronic filing is faster and reduces errors, and the state processes e-filed returns more quickly than paper returns.

The important date to file is April 15 unless that date falls on a weekend or holiday, in which case it moves to the next business day. If you need more time, you can request an extension, which gives you until October 15 to file. An extension to file is not an extension to pay—you still owe any tax due by April 15, or you'll face penalties and interest.

Tax credits and deductions available to Vermont residents

Vermont offers several credits that can reduce your tax bill. The Earned Income Tax Credit (EITC) is available to lower-income working people and families. Vermont's version is based on the federal EITC but is calculated separately. You must claim the federal EITC first, then you can claim Vermont's credit on your state return.

Vermont also offers a Property Tax Credit for homeowners and renters with lower incomes, a Dependent Care Credit, and a Child and Dependent Care Credit. Each has its own income limits and calculation rules. The Vermont Department of Taxes website lists all available credits with worksheets and instructions. Your tax software will ask questions about your situation and calculate any credits you're may have access to to.

Where to find Vermont tax forms and help

The Vermont Department of Taxes website (tax.vermont.gov) is the official source for all state tax forms, instructions, and current information. You can read Form VT-104 and all supporting schedules there. The site also has a phone line where you can speak with a tax representative about questions on your return.

If you use tax software, most major programs include Vermont forms and will calculate your state tax automatically once you enter your federal information. If you hire a tax preparer, make sure they're familiar with Vermont's rules, especially the federal income tax deduction, which is unique to Vermont and can significantly affect your bill.

Frequently Asked Questions

Do I have to pay Vermont income tax if I work in Vermont but live in another state?

Yes. Vermont taxes anyone who earns income in the state, whether they live there or not. However, you may be able to claim a credit on your home state's return for taxes paid to Vermont to avoid double taxation. Check with your home state's tax agency about how they handle this situation.

Can I deduct state income tax on my federal return?

You can deduct state and local taxes (SALT) on your federal return, but only up to $10,000 per year. This includes Vermont income tax, property tax, and sales tax combined. You must itemize deductions on your federal return to claim this—you cannot claim it if you take the standard deduction.

What happens if I don't file a Vermont tax return when I'm supposed to?

Vermont charges penalties for late filing and late payment. The failure-to-file penalty is 5% of the unpaid tax per month, up to 25%. The failure-to-pay penalty is 0.5% per month. Interest also accrues on unpaid tax. If you realize you missed a important date, file as soon as possible to minimize penalties.

Does Vermont tax retirement income or Social Security?

Vermont does not tax Social Security benefits. Retirement income from pensions and 401(k) withdrawals is taxed as ordinary income. However, Vermont offers a pension and retirement income exclusion for residents age 65 and older—you can exclude up to $10,000 of may have access to retirement income from taxation.

Can I file my Vermont return electronically if I'm not using tax software?

The Vermont Department of Taxes does not offer a free online filing tool on its website, so you'll need to either use commercial tax software, mail a paper return, or work with a tax preparer. Many tax preparation organizations offer free filing services to lower-income residents—check the Vermont Department of Taxes website for a list of free filing locations.