How Vermont income tax works: federal AGI, no itemizing, four brackets

Vermont’s income tax begins where the federal return pauses. Line 1 of Form IN-111 is federal adjusted gross income, line 11 of Form 1040, and the state builds its own return from there. Everything the federal return does after AGI, the standard deduction, Schedule A, the senior deduction, the 2025 deductions for tips, overtime and car-loan interest, the qualified business income deduction, never reaches Vermont. In their place the state gives its own standard deduction, $7,650 single or $15,300 joint for 2025 (2026 figures to come in December), a personal exemption of $5,300 (2025 figure) for each person on the return, and a short list of subtractions. What is left is taxed in four brackets, 3.35%, 6.60%, 7.60% and 8.75%, and if federal AGI is over $150,000 the tax is never less than 3% of AGI. There are no local income taxes and no itemized deductions.

That design explains most of what surprises people about the Vermont return. A deduction taken below the federal AGI line is worth nothing here, so a server who owes no federal tax on $8,000 of tips still owes Vermont $268 on them at 3.35%. An adjustment taken above the line, an IRA or HSA contribution, half of self-employment tax, the self-employed health insurance deduction, flows through and cuts Vermont tax too. And because Vermont does not itemize, the $40,000 federal SALT cap and the mortgage interest deduction are federal matters only; the state offers a 5% charitable credit and a narrow medical subtraction instead.

Who files

A Vermont resident is someone domiciled in Vermont, or someone who kept a permanent home here and was in the state more than 183 days in the year. A resident reports all income, wherever earned, and takes a credit on Schedule IN-117 for income tax paid to another state or a Canadian province on income both tax. A part-year resident reports income for the months of residence plus Vermont-source income from the rest of the year; a nonresident reports only Vermont-source income. Both attach Schedule IN-113, which works out the Vermont share. The filing test is simple: file if you had to file a federal return and had more than $100 of Vermont income, or, as a nonresident, more than $1,000 of Vermont gross income. Filing status must match the federal return, with two exceptions, civil union couples and a married couple where only one spouse has enough Vermont connection (generally 183 or more days of work here) to be taxed. The Department of Taxes administers all of it from Montpelier; the Department’s online system is myVTax.

Where it starts: federal AGI

Line 1 is federal AGI, copied from the 1040. Act 164, signed June 18, 2026, tied Vermont to the Internal Revenue Code as of December 31, 2025, retroactive to tax years beginning January 1, 2025, so the AGI Vermont starts from is the one computed under the July 2025 federal law. That matters less than it sounds. The headline items in that law, the tip and overtime deductions, the $6,000 senior deduction, the car-loan interest deduction, the larger standard deduction and SALT cap, all sit below AGI on the federal return and so never arrive on IN-111. No Vermont add-back is needed for them because nothing was taken out. The federal changes that do change AGI, the dependent care FSA limit, HSA rules, the 1099-K threshold, flow through automatically.

Vermont kept its distance from the federal law on business depreciation. It has long required a federal bonus depreciation add-back, and Act 164 added the new section 168(n) qualified production property expensing to the list and limited the section 174A research expensing to businesses meeting a $31 million gross receipts test. Most households will never see these lines; a Schedule C, E or F filer who took bonus depreciation will.

The additions

Schedule IN-112, Part I, lists them. For most people there is one, and often none.

Interest on other states’ bonds. Line 1 picks up all federally tax-exempt interest and dividends, line 2 takes back the Vermont share, and line 3 is the difference. The result is that Vermont taxes municipal bond interest from other states and exempts its own. A brokerage 1099 or a national muni fund statement that lumps all tax-exempt interest together has to be split.

Bonus depreciation. Line 4. A sole proprietor, landlord or farmer who claimed federal bonus depreciation adds it back here, then recovers it over the asset’s life through the subtraction on line 9. Over the asset’s life the totals match; the timing does not. Software handles this when it is told to; a do-it-yourself return often misses it.

The subtractions

This is the longer list, and the one that gives money back.

Line numbers are from the 2025 Schedule IN-112; the 2026 schedule is expected to keep them. The Social Security, retirement and military lines are covered in Vermont for retirees.

The capital gains exclusion. Vermont is one of the few states with its own break for capital gains, and for most readers it comes to $5,000. Schedule IN-153 offers a choice: a flat $5,000 of net adjusted capital gain, or 40% of the gain on assets held more than three years. The 40% option excludes the assets most people sell, publicly traded stocks and bonds, a home or other residential real estate, and depreciable personal property other than farm property and standing timber, so it mostly serves farms, closely held businesses and land. Either way the exclusion is capped at the lesser of 40% of federal taxable income or $350,000, and there is none in a year with a net capital loss. Qualified dividends get no break at all; they are taxed at the ordinary rates like everything else.

The medical subtraction. It sounds generous and almost never applies. Take the federal Schedule A medical total after the 7.5%-of-AGI floor, remove any continuing-care retirement community fees above Vermont’s age-based limits ($480 to $6,020 per person for 2025), then subtract the Vermont standard deduction and exemptions from line 6 of IN-111. Only what is left is deductible. For a single filer that means medical bills above about $12,950 beyond the federal floor before the first dollar counts.

The standard deduction and the exemption

Vermont has no itemized deductions. Everyone takes the Vermont standard deduction, whether or not they itemized federally, and everyone claims the personal exemption. For 2025 the deduction was $7,650 for single and married-filing-separately filers, $11,450 for head of household and $15,300 for a joint return or qualifying surviving spouse, plus $1,250 for each age-65-or-older or blind box checked on the federal Form 1040. The exemption was $5,300 for the taxpayer, the spouse and each dependent. Both are indexed to inflation each year; the 2026 amounts are to come, normally in late December. The 2026 withholding allowance rose to $5,400, which suggests where the exemption is headed.

The two together are the whole deduction. A married couple with two children claims $15,300 plus $21,200, or $36,500 (2025 figures); a retired couple both over 65 claims $17,800 plus $10,600, or $28,400. Unlike the federal exemption that disappeared in 2018, Vermont’s has no phase-out at high incomes. What hits high earners instead is the 3% floor, below.

The rates

AGI plus additions minus subtractions is line 3. Line 3 minus the standard deduction and exemptions is Vermont taxable income, line 7. The tax on line 8 comes from the rate schedule or tax table for your filing status. The Department published preliminary 2026 schedules in the IN-114 estimated tax instructions; the final schedules and tables arrive in December.

Brackets apply to Vermont taxable income, after the standard deduction and exemptions. The 2025 single breakpoints were $49,400, $119,700 and $249,700, so the 2026 preliminary figures reflect roughly 2.7% indexing.

The brackets are marginal. A single filer with $59,550 of taxable income pays 3.35% on the first $50,750 and 6.60% only on the $8,800 above it. Capital gains (after the exclusion), dividends, interest, rent, unemployment and gambling winnings are all taxed at the same rates as wages.

The 3% floor. If federal AGI is over $150,000, line 8 is the greater of the tax from the schedule or 3% of AGI (less interest on U.S. obligations). The floor exists to keep the capital gains exclusion and other subtractions from driving a high earner’s bill too low. Most people over $150,000 clear it easily; a household with a large excluded gain in a year of modest other income may not.

The credits

Vermont credits come in two kinds. The nonrefundable ones reduce the tax and stop at zero. The refundable ones on Schedule IN-112, Part II, pay out even when there is no tax, and they are where the state spends its money on families.

The family credits are worked through in Credits and breaks for Vermont families. The Property Tax Credit and Renter Credit are filed with the return but are not income tax credits; they are below.

The charitable credit deserves a sentence because it is easy to miss. The federal return no longer asks non-itemizers much about giving, but Vermont wants the total on line 11 of IN-111 whether you itemized or not. Gifts of $3,000 are worth $150 off the Vermont tax.

The property tax lines on the return

Vermont runs its property tax relief through the Department of Taxes, and two claims travel with the income tax return without being part of the income tax.

Homestead Declaration and Property Tax Credit, Form HS-122. Every Vermont homeowner who lives in the home as a principal residence on April 1 files Section A, the Homestead Declaration, every year by April 15. Miss it and the town may add a penalty of up to 3% or 8%; miss October 15 and the property is taxed at the nonhomestead rate. Section B, with household income Schedule HI-144, is the Property Tax Credit claim: a homeowner domiciled in Vermont all year, with household income of $115,400 or less (2026 claim, based on 2025 income; the 2027 ceiling is to come), gets a credit of up to $8,000 ($5,600 education, $2,400 municipal) against the property tax on the housesite, paid to the town and shown on the tax bill. Household income counts everyone in the home and includes Social Security and other income the income tax ignores. The final deadline is October 15; a claim filed after April 15 under the extended route loses $150.

Renter Credit, Form RCC-146. A renter domiciled in Vermont all year who paid rent for at least six months and is not anyone’s dependent claims a credit based on 10% of HUD fair market rent for the county and household size, income-tested by county (for the 2025 claim, full credit up to $21,800 to $27,300 for one person depending on county; 2026 claim limits to come). It needs the rental’s SPAN; the landlord files a Landlord Certificate with the Department, and the claim is honored once it is on file. It can be filed with the return, alone on myVTax, or on paper, and it has no extension: April 15 due, October 15 final.

Withholding and estimated payments

Vermont withholding on wages follows Form W-4VT, which is optional; without one the employer works from the federal W-4, which since 2020 has had no allowances and often produces the wrong Vermont result. The W-4VT allowance for 2026 is $5,400. Pension and annuity payers withhold Vermont tax on request. Nothing is withheld from Social Security.

Anyone who expects to owe $500 or more after withholding makes estimated payments on Form IN-114 or through myVTax, due April 15, June 15 and September 15, 2026, and January 15, 2027. The safe harbor is 100% of last year’s Vermont tax or 90% of this year’s, paid in four equal installments. Farmers and fishermen with two-thirds of their income from farming or fishing are exempt. The people usually caught are the self-employed, landlords, retirees with large IRA withdrawals and no withholding, and anyone with a big capital gain.

How to file

The 2026 return is due April 15, 2027. A federal extension automatically extends the Vermont return to October 15, 2027; file Form IN-151 only to make an extension payment or if you have no federal extension. The extension is to file, not to pay. Vermont charges no late-filing penalty for a return filed within 60 days of April 15, then $50; an extended return that misses October 15 draws the $50 even with a refund due. E-filing requires commercial software or a paid preparer; the Department does not offer its own free filing of IN-111, though Vermont participates in IRS Free File for those under the income limit. E-filed refunds take about six to eight weeks, paper eight to twelve, and returns filed before the end of January are held for W-2 matching. Refund status and identity verification letters are handled on myVTax.

Untaxed online and out-of-state purchases go on line 22 as use tax at 6%. If you kept no records, the table amount runs from $0 at AGI under $20,000 to the lesser of 0.05% of AGI or $150 at $100,001 and up.

What trips people up

• Expecting the federal tip, overtime or senior deduction to reduce Vermont tax. None of them reach IN-111.
• Social Security left fully taxable because software was never told the AGI was under $55,000 or $70,000, or taken fully exempt when AGI was over the line.
• A Roth conversion or IRA withdrawal that pushes AGI through the Social Security phase-out and taxes the benefits too.
• Out-of-state municipal bond interest left off IN-112 line 1.
• Bonus depreciation on a Schedule C or E carried into Vermont with no add-back.
• Charitable gifts not reported on IN-111 line 11 because the federal return did not ask.
• The Homestead Declaration not filed because the homeowner’s income is too high for the credit. The declaration is required regardless.
• The Renter Credit missed because no income tax return was due. It is a separate claim.
• The extension treated as an extension to pay, or the October 15 date missed on a refund return.