Vermont for retirees: the Social Security income line, and everything else is taxed

A retired Vermonter’s state tax turns on one number: federal adjusted gross income. If AGI is $55,000 or less on a single return, or $70,000 or less on a joint return, every dollar of Social Security that was taxed federally comes back off on Schedule IN-112, and Vermont taxes none of it. Between $55,000 and $65,000 ($70,000 to $80,000 joint) the exemption shrinks by 10% for every $1,000 of AGI, and at $65,000 or $80,000 it is gone. Beyond that line Vermont has no general retirement income exclusion. Pensions, traditional IRA and 401(k) withdrawals, annuities and Roth conversions are taxed as ordinary income at the graduated rates, 3.35% to 8.75%. The exceptions are military retirement and survivor pay, exempt in full up to $125,000 of AGI, and $10,000 of a Civil Service Retirement System or similar pension not covered by Social Security, which can be taken instead of, not with, the Social Security exemption. The $6,000 federal senior deduction does nothing here, because it is taken below the AGI line Vermont starts from.

The practical consequence is that the Social Security exemption behaves like a cliff with a ten-thousand-dollar ramp. A couple at $69,000 of AGI pays Vermont tax on none of their benefits. The same couple at $80,000, after one more IRA withdrawal, pays tax on all of them, plus tax on the withdrawal. The worked example below puts numbers on it.

Social Security: the income lines

Only the federally taxable portion of Social Security, line 6b of Form 1040, is in play. Benefits that escaped federal tax were never in AGI and never reach Vermont. For the part that was taxed federally, the Retirement Income Exemption Worksheet in the Schedule IN-112 instructions does the arithmetic:

In the partial range the exempt share is ($80,000 minus AGI) ÷ $10,000 for joint filers, ($65,000 minus AGI) ÷ $10,000 for everyone else. A single filer at $60,000 with $20,000 of taxable benefits exempts half, $10,000. The lines rose $5,000 for 2025 under Act 71; some older pages on the Department’s site still show $50,000 and $65,000. The IN-112 instructions are the authority.

Two things about the test matter. First, it is AGI, not taxable income, and not Vermont income: the test is run before the Vermont standard deduction and before the exemption itself is subtracted. Second, the AGI includes the taxable Social Security. A couple whose pension and IRA income total $55,000 and whose benefits add $18,000 of taxable Social Security has an AGI of $73,000, in the phase-out, even though their non-benefit income is well under $70,000.

Pensions, IRAs and 401(k)s: taxed

Vermont has no age-based exclusion and no general pension exclusion. Whatever is taxable on federal lines 4b and 5b is in Vermont AGI and stays there. That includes:

• Private pensions and employer annuities.
• State and local government pensions, including Vermont’s own state employee, teacher and municipal retirement systems.
• Traditional IRA, SEP and SIMPLE IRA withdrawals, including required minimum distributions.
• 401(k), 403(b) and 457 distributions.
• Roth conversions, in the year of conversion.
• The taxable part of a nonqualified annuity.

Vermont also piggybacks on the federal early-withdrawal penalty. If you paid the federal 10% additional tax on a retirement distribution before 59½, Schedule IN-119, Part I adds 24% of that penalty to your Vermont tax. On a $20,000 early withdrawal that is $2,000 federally and $480 more to Vermont, on top of the income tax.

The three exclusions that do exist

Military retirement and survivor benefit pay, IN-112 line 13. New for 2025 under Act 71 and continuing. Retired pay under Title 10 (Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Guard, plus the Public Health Service and NOAA commissioned corps) and survivor benefit plan payments are fully excluded when AGI is $125,000 or less, phased out proportionally between $125,000 and $175,000 (the excluded share is ($175,000 minus AGI) ÷ $50,000), and not excluded at $175,000 or more. This exclusion can be claimed alongside the Social Security exclusion. A retired colonel with a $60,000 pension, $30,000 of taxable Social Security and $20,000 of other income has AGI of $110,000, excludes the whole pension, and because AGI is over $80,000 excludes none of the Social Security.

$10,000 of CSRS or other non-covered pensions, IN-112 line 12. A retiree whose federal Civil Service Retirement System pension, or another government pension based on work that was not covered by Social Security, is taxable can exclude the first $10,000 of it under the same AGI lines as Social Security ($55,000 / $70,000 full, gone at $65,000 / $80,000). This is an election: you take either this $10,000 exclusion or the Social Security exclusion, not both. For someone with both a small CSRS pension and Social Security, the worksheet should be run both ways.

Railroad Retirement, IN-112 line 14. Tier 1 and Tier 2 benefits are subtracted in full, with no income test, because federal law bars states from taxing them.

The federal senior deduction, and why it does not help here

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, comes off after adjusted gross income, alongside the standard deduction. Vermont starts from AGI, so the deduction never arrives, and there is no add-back because nothing was taken out. The same is true of the extra federal standard deduction for age. What Vermont gives seniors instead is $1,250 (2025 figure) added to the Vermont standard deduction for each age-65-or-older box checked on the federal Form 1040, worth about $42 of tax at 3.35% per person, and the Credit for the Elderly or the Disabled at 24% of the federal Schedule R credit, which few people qualify for federally.

Roth conversions

A Roth conversion is taxed by Vermont in the year of conversion, at the graduated rates, exactly like any other IRA withdrawal. There is no state break. For a retiree near the Social Security lines, a conversion has a second cost: it raises AGI, and if it carries AGI past $70,000 (joint) or $55,000 (single) it taxes the benefits too, as in the example above. The same AGI increase can raise Medicare premiums two years later through IRMAA and make more Social Security taxable federally.

That does not make conversions a bad idea in Vermont; it makes the size and timing matter. A couple with AGI of $50,000 before any conversion can convert about $20,000 a year and stay under the $70,000 line, paying 3.35% to Vermont on the converted amount and nothing on their benefits. A couple already over $80,000 of AGI has lost the Social Security exemption anyway, and for them a conversion costs only the Vermont rate on the amount converted, 3.35% up to $84,700 of taxable income on a joint return and 6.60% above that (preliminary 2026 brackets). Later Roth withdrawals are tax-free federally and in Vermont, and they do not count toward the Social Security test. For anyone planning a move to or from Vermont in retirement, Moving to Vermont covers which state taxes a conversion in the move year.

Capital gains in retirement

Retirees drawing on a taxable brokerage account get the Vermont capital gains exclusion on Schedule IN-153: a flat $5,000 of net capital gain, or 40% of gains on assets held more than three years other than publicly traded securities and a residence. For a portfolio of stocks and funds, that means $5,000. The gain on a home sale is excluded federally up to $250,000 single or $500,000 joint, and whatever is excluded federally never reaches Vermont; a gain above those amounts is taxed by Vermont at the ordinary rates, less the $5,000. Qualified dividends have no preferential rate here.

Property tax relief: income-tested, not age-tested

Vermont has no senior property tax freeze and no age-based homestead exemption. Its relief is the Property Tax Credit, open to any homeowner at any age whose household income is under the ceiling, and it reaches a great many retired households because it is based on income rather than birth date. The pieces:

Household income on Schedule HI-144 is not AGI. It counts all Social Security, including the part the income tax ignores, all pension and IRA income, and the income of everyone living in the home. A couple whose AGI is $68,850 in the example above has household income closer to $85,000 once the full $40,000 of Social Security is counted, still well under the ceiling.

The Property Tax Credit is filed with the income tax return but does not depend on it; a retiree who owes no Vermont tax and files no IN-111 still files HS-122 and HI-144. Miss April 15 and the claim can still be filed through October 15 at a cost of $150 off the credit. Miss the Homestead Declaration past October 15 and the home is taxed at the nonhomestead rate for the year, which on many Vermont homes costs more than the credit itself.

Withholding and estimated payments

Nothing is withheld from Social Security for Vermont. Pension payers and IRA custodians will withhold Vermont tax on request, and for a retiree whose pension and IRA income is taxed in full that is the easiest way to avoid a bill. Otherwise, anyone expecting to owe $500 or more after withholding makes estimated payments on Form IN-114 or through myVTax, due April 15, June 15, September 15 and January 15, with a safe harbor of 100% of last year’s Vermont tax or 90% of this year’s. The first year of RMDs is when retirees most often get caught.