Moving to Vermont

Vermont taxes two kinds of people in full: anyone domiciled in Vermont, and anyone who keeps a permanent home in the state and spends more than 183 days of the year here. Everyone else is taxed only on Vermont-source income, which means wages for work physically performed in Vermont, income from a Vermont business, and rent or gain from Vermont property. The year you move you are a part-year resident, and the Vermont return handles that with a ratio rather than two separate computations: the tax is figured on your whole year’s income as though you had lived here all year, then multiplied by the Vermont share of that income from Schedule IN-113. Vermont has no reciprocal agreement with any state, so a Vermonter who works in another state that taxes wages files there too and takes a credit on Schedule IN-117; a Vermonter who works in a state with no wage tax owes Vermont on all of it.

The filing test is low. A resident or part-year resident files if a federal return was required and more than $100 of the year’s income was Vermont income. A nonresident files if Vermont gross income was more than $1,000, or net Vermont income more than $100. Almost anyone who moves in or out mid-year with a job will file.

Resident, part-year, nonresident

The Department of Taxes uses two tests, and meeting either one makes you a resident for that part of the year.

Domicile. Your domicile is your one permanent home, the place you intend to return to when you are away. It does not change because you spent a winter elsewhere or took a two-year assignment out of state. It changes when you leave Vermont intending not to come back and establish a new permanent home somewhere else. The Department looks at the ordinary evidence: where your house is and whether you declared it a homestead, where you are registered to vote, where your driver’s license and vehicles are registered, where your family lives, where your doctors, bank accounts and professional licenses are, and where you spend your time. If a move is questioned, the Department asks for the facts in writing; it has a statement form for that purpose (verify).

The 183-day test. Someone domiciled elsewhere who keeps a permanent home in Vermont and is present in the state more than 183 days in the year is a resident anyway. A second home in Stowe that you use for 190 days makes you a Vermont resident for the year regardless of where you vote. Days are counted by presence; keep a calendar if you are close to the line.

Part-year resident. Someone who met the definition of resident for part of the year, most often because they moved in or out. You report everything you earned while a resident plus Vermont-source income from the nonresident months.

Nonresident. Domiciled elsewhere and in Vermont 183 days or fewer. Taxed only on Vermont-source income. The Department’s list is specific: wages, salaries and commissions for services performed in Vermont; income from a business, trade or profession carried on in Vermont, including payments tied to the sale of a Vermont business; rents and royalties from Vermont property; gains from the sale of Vermont property, including timber; and previously deferred nonqualified deferred compensation. Pensions, Social Security, interest, dividends and gains on stocks are not Vermont-source income for a nonresident, whoever paid them.

The part-year return: one tax, one ratio

Vermont does not ask a part-year resident to build a second, smaller return. Form IN-111 is completed as if you had been a resident all year: federal AGI on line 1, the Vermont additions and subtractions, the full Vermont standard deduction and exemptions, and the tax from the rate schedule on line 14. Then Schedule IN-113 does the apportioning. Part I lists each item of federal income in column A and the Vermont portion in column B; the Vermont portion is income received while you were a resident or, for the nonresident months, income from Vermont sources. Part II turns that into a percentage: Vermont income divided by federal AGI, carried to four decimals, entered on IN-111 line 15. Line 16, the adjusted tax, is line 14 multiplied by that percentage.

Two things follow from the method. First, the rate you pay on your Vermont income is set by your whole year’s income, not just the Vermont part. A high earner who moves in for the last two months pays at the bracket their full-year income reaches. Second, the full standard deduction and exemptions are built into the line 14 tax rather than prorated separately; the ratio does the prorating.

No reciprocity, and the Schedule IN-117 credit

Vermont has no reciprocal agreement with any state. A Vermont resident who works across the line in a state that taxes wages files a nonresident return there and a resident return here, reporting the wages to both. The relief is the credit for income tax paid to another state or Canadian province on Schedule IN-117, one schedule per state. The credit is the lesser of two numbers: the tax actually paid to the other state on that income, or the Vermont tax on the same income, found by multiplying Vermont tax (IN-111 line 14) by the other state’s share of your adjusted gross income. Withholding is not the same as tax paid; the credit is for the liability shown on the other state’s return. City and county income taxes do not count. Canadian provincial tax counts only to the extent it was not used as a foreign tax credit on the federal return.

A Vermont resident who works in a state with no tax on wages gets no credit, because there is no other-state tax to credit, and owes Vermont on the whole salary. Employers in such a state do not withhold Vermont tax unless asked, so a commuter in that position should either have the employer withhold Vermont tax voluntarily or make estimated payments on Form IN-114; the Department’s estimated tax page names a Vermont resident working in another state as one of the people who should be paying quarterly.

For a part-year resident, the credit is capped at the tax on Schedule IN-113 line 27 and applies only to income taxed by both states during the Vermont months. Income earned in the former state before the move was never Vermont income and needs no credit.

Remote work across the line

Vermont taxes a nonresident’s wages only for services performed in Vermont, and it has no rule that treats a remote worker as present at the employer’s office. So a nonresident who works from home in another state for a Vermont employer owes Vermont nothing on those wages, and the Vermont employer should not withhold Vermont tax on them. The reverse: a Vermont resident working from a Vermont home for an out-of-state employer owes Vermont on everything, as a resident, and owes the employer’s state only if that state reaches remote workers under its own law. Some states do, and when one does, the Schedule IN-117 credit applies to the tax it collects. A hybrid worker who is in the office across the line three days a week and home in Vermont two days has 60% of the wages taxed by the other state and 100% taxed by Vermont, with the credit covering the overlap. Keep the day count; both states will ask for it.

The 0.44% Child Care Contribution follows the same geography: employers pay it only on wages subject to Vermont withholding, and the self-employed pay 0.11% on self-employment income earned while physically in Vermont, resident or not.

Selling Vermont property after you leave

When a nonresident sells Vermont real estate, the buyer must withhold 2.5% of the sale price and send it to the Department on Form RW-171 within 30 days of the transfer. Nonresident means domiciled outside Vermont on the day of closing, so a former Vermonter who moved away in May and closes on the old house in September is a nonresident seller. If any one seller is a nonresident, the whole sale is subject to withholding unless the resident sellers obtain a Commissioner’s Certificate. The 2.5% is withholding, not tax: the seller files a Vermont return for the year, reports the gain (or no gain, if the federal home-sale exclusion covers it), claims the withheld amount as a payment, and gets back whatever exceeds the actual tax. A seller who expects little or no gain can apply for a Commissioner’s Certificate before closing to reduce or eliminate the withholding. Either way, a Vermont return is due by the federal deadline.

Retirement income in the move year

Federal law bars a state from taxing the retirement income of someone who no longer lives there, so a pension is taxed by the state you live in when each payment arrives, and pension, IRA and Social Security payments are split by month of residence on Schedule IN-113. The Social Security and military retirement exemptions on Schedule IN-112 are tested against full-year federal AGI, not the Vermont share. A Roth conversion is taxed by the state of residence on the day of conversion: someone leaving Vermont converts after the move, someone arriving converts before. Vermont for retirees has the thresholds.

The credits in a move year

The refundable credits on Schedule IN-112 Part II, the $1,000 Child Tax Credit, the earned income credit and the child and dependent care credit, are prorated for a part-year resident by the Vermont share of total income, lines 14 through 17 of Part II, using the column totals from Schedule IN-113. A family that earned 40% of its income after moving to Vermont gets 40% of each credit. The Renter Credit and the Property Tax Credit are different: both require Vermont domicile for the entire year, so neither is available in the year you arrive, and neither is available in the year you leave. A homeowner who moves out after April 1 still had a Vermont homestead on April 1 and may still owe a Homestead Declaration for that year; check with the town.

The year you move: what to do

• Give your new Vermont employer a Form W-4VT; without one the employer works from the federal W-4, which has no allowances and often under-withholds.
• If you work in a state with no wage tax and live in Vermont, start estimated payments on Form IN-114 or ask the employer to withhold Vermont tax voluntarily.
• Keep income by period: the last pay stub before the move and the first after, 1099 statements by month, and the dates of every retirement payment.
• Keep a day calendar if you will have homes in two states.
• Change the evidence of domicile all at once: voter registration, driver’s license, vehicle registration, the address on your federal return, your doctors and bank. A move that is complete on paper is hard to question.
• If you bought a Vermont home and live in it on April 1, file the Homestead Declaration (Form HS-122) by April 15 of the following year, even though the Property Tax Credit is not yet available.
• If you are leaving and selling, decide before closing whether to apply for a Commissioner’s Certificate on the 2.5% withholding.
• File the former state’s part-year return and Vermont’s in the same sitting; the IN-117 credit, if any, needs the other return finished first.