What’s new in Vermont for 2026: Act 164 conformity, and why the federal tip and overtime breaks stop at the state line

The biggest Vermont tax story of 2026 is that the federal law of July 2025 changed almost nothing on the Vermont return. Act 164, signed June 18, 2026, moved Vermont’s link to the Internal Revenue Code forward to December 31, 2025, retroactive to tax years beginning January 1, 2025, so the federal adjusted gross income that Form IN-111 starts from is the one computed under the new federal rules. But the headline federal breaks, the deductions for tips, overtime, seniors and car-loan interest, the larger standard deduction and the $40,000 SALT cap, all sit below the AGI line, and Vermont has started from AGI since 2018. They never arrive. A Vermont server who owes no federal income tax on $8,000 of tips owes Vermont $268 on them at 3.35%, exactly as in 2024. The Department of Taxes says it plainly: for most taxpayers the conformity changes “will not impact your filing.” What did change is narrower: three business depreciation and research items Vermont declined to follow, a new estate tax filing threshold, indexed brackets, and the second year of the 2025 retirement and family changes.

If you are looking for a new Vermont subtraction for tips or overtime, there is none. No bill creating one was enacted in the 2026 session, and the Department’s guidance on the federal law mentions none.

Act 164: conformity, with three carve-outs

Vermont conforms to the federal code as of a fixed date and moves the date by statute each year. Act 164 (H.933) did that for the July 2025 law and reached back to cover 2025 as well, so both the 2025 and 2026 Vermont returns begin from a post-federal-law AGI. Federal changes that alter AGI flow through without a Vermont line: the higher dependent care FSA limit, the health savings account changes, the 1099-K reporting threshold, the student loan rules. Federal changes below AGI are invisible.

The Department’s conformity page and its 2025 Federal Conformity Supplement name three provisions Vermont decoupled from, all of them business items:

Federal bonus depreciation under section 168(k) was already added back on IN-112 line 4 before Act 164; the new law extended the same treatment to 168(n). A filer with both must attach a schedule showing each amount. Vermont also adds back the expanded federal section 1202 small business stock exclusion for tax years beginning in 2026 (verify); it is not mentioned in the Department’s supplement, and the Vermont reviewer should confirm it.

Filers who took 168(n) or 174A on a 2025 return filed before June 2026 may need to amend; the Department’s notice of June 22, 2026 says those who had not yet filed should follow the supplement and that penalty and interest caused by the conformity changes can be waived on request, case by case. For a household with a Schedule C, E or F and no qualified production property, nothing changed.

Tips, overtime, seniors, car loans: still fully taxed in Vermont

This is the question the Department will be asked most this season, so it is worth being exact about why. The federal deductions for qualified tips (up to $25,000) and qualified overtime (up to $12,500, $25,000 joint), the $6,000 senior deduction and the car-loan interest deduction are all taken on the federal return after adjusted gross income is fixed. Vermont copies line 11 of the Form 1040 to line 1 of IN-111 and never looks further down the federal page. The tips and overtime are inside line 11. Nothing on Schedule IN-112 takes them back out.

Act 71: the second year

The retirement and family changes Vermont made in 2025 continue unchanged for 2026, and for anyone who did not file a 2025 return yet, or filed one with old software, they are worth restating.

• Social Security exemption lines. Full exemption at federal AGI of $55,000 or less (single, head of household, married filing separately, surviving spouse) or $70,000 or less (joint), phased out over the next $10,000 and gone at $65,000 / $80,000. The lines rose $5,000 for 2025. They are not indexed, and nothing in the 2026 session moved them (verify).
• Military retirement and survivor benefit pay. Fully exempt at AGI of $125,000 or less, phased out between $125,000 and $175,000, on IN-112 line 13. Claimable alongside the Social Security exemption.
• Child Tax Credit to age 6. $1,000 per child who was 6 or younger at year end, so children born 2020 through 2026, full at AGI of $125,000, gone at $174,001.
• Veteran Tax Credit. $250, refundable, for AGI up to $25,000 and phased out by $30,000.

The 2026 brackets, preliminary

The four rates are unchanged, 3.35%, 6.60%, 7.60% and 8.75%. The breakpoints are indexed, and the Department published its preliminary 2026 figures in the Form IN-114 estimated tax instructions. The final schedules and tax tables, and the 2026 standard deduction and personal exemption, are normally posted in late December and are to come.

Head of household and married filing separately schedules moved in step: head of household 3.35% to $68,000, separate filers to $42,350 (preliminary). The 2026 withholding allowance on Form W-4VT rose to $5,400 from $5,300, which is the usual signal that the personal exemption will follow (verify).

Estate tax: the filing threshold catches up

Vermont’s estate tax has applied only above $5,000,000 of gross estate plus taxable gifts made within two years of death since 2021, but until this year some smaller estates still had to file Form EST-191. Act 164 raised the filing threshold to $5,000,000 to match, effective June 18, 2026, so an estate under the line that owes nothing also files nothing, unless a federal Form 706 is required. The rate on the excess and the due date of EST-191 are on the Department’s estate tax page and the form instructions; the rate is a flat 16% (verify). There is still no Vermont gift tax and no inheritance tax.

Smaller items

• Research credit. Act 164 raises the Vermont research and development credit from 27% to 75% of the federal credit for tax years beginning in 2027; nothing changes on the 2026 return.
• Direct File. IRS Direct File did not run for the 2026 filing season and Vermont has announced no replacement; the IRS has since ended the program. Vermont remains in IRS Free File for filers under the income limit, and VITA and AARP Tax-Aide sites operate statewide.
• Child Care Contribution. Unchanged: 0.44% of wages, paid by employers, and 0.11% of self-employment income earned in Vermont, paid with the return. It began July 1, 2024 and is now in its first full calendar year on both sides.
• No ballot measures. Vermont has no statewide initiative or referendum, and no tax question was on the November 3, 2026 ballot; the one statewide proposal concerned collective bargaining.

The 2026 return next to the 2025 return

For a wage earner with no business depreciation, the 2026 Vermont return should look like the 2025 one with slightly wider brackets and a slightly larger deduction and exemption. The federal return will look very different. That gap is the thing to prepare clients and family for.