Social Security Exemption Overview

Act 11 of the 2018 special legislative session created a Vermont personal income tax exemption for Social Security beneficiaries who are below certain income thresholds. The new law eliminates or reduces the Vermont tax imposed on federally taxable Social Security benefits for nearly 40,000 income-eligible taxpayers. The exemption takes effect in calendar year 2018 for tax returns filed in 2019. If you make estimated tax payments, the exemption may reduce your quarterly payment.

Issue brief on this topic

Legislation

The new Social Security exemption became law as part of Act 11 Sec. H.5 of the 2018 legislative special session.

Federal Taxation of Social Security Benefits and Effect on Vermont

At the federal level, the personal income of a Social Security beneficiary determines how much of his or her Social Security benefits are taxed. This taxable portion of Social Security benefits may become part of a Vermonter’s Adjusted Gross Income (AGI) at the federal level. Federal AGI flows through to Vermont and becomes the starting point for determining Vermont taxable income.

This new Vermont exemption allows income-eligible taxpayers to subtract all or part of federally taxable Social Security benefits from their AGI. This means that the federally taxable portion of Social Security benefits is eliminated or reduced for Vermont income-eligible taxpayers receiving Social Security benefits.

For a breakdown of the federal taxation of Social Security benefits, see the table below. For more on federal taxation of Social Security benefits, please read this overview by the Social Security Administration.

Table 1: Federal Taxation of Social Security Benefits by Income and Filing Status
Single/Separate/Widow(er)/HoH
Combined Income
Married Joint
Combined Income
Percentage of Social Security
Benefits that are Taxed
Less than $25,000 Less than $32,000 0%
$25,000-$34,000 $32,000 - $44,000 Up to 50%
Greater than $34,000 Greater than $44,000 Up to 85%
Vermont’s Social Security Exemption

Vermont’s new personal income tax exemption of Social Security benefits reduces tax liabilities mainly for lower- and middle-income Vermonters who are retired or disabled. It does this by excluding from taxable income all or part of taxable Social Security benefits reported on the federal Form 1040, U.S. Individual Income Tax Return, which are included in federal AGI. The exemption does not exclude other types of income.

For those who are married filing jointly and civil union partner filing jointly, the exemption applies in full up to an AGI of $60,000, phases out between $60,000-$70,000, and does not apply to filers with AGI greater than or equal to $70,000. For all other filing statuses, the Vermont exemption applies in full to an AGI up to $45,000. It then phases out smoothly for filers earning between $45,000-$55,000. It does not apply to filers with AGI greater than or equal to $55,000. The exemption reduces a taxpayer’s Vermont taxable income before state tax rates are applied.

Table 2 illustrates how the Vermont exemption is applied by filing status and income level. Graph 1 shows the percentage of taxable Social Security benefits that are exempt from Vermont taxable income based on filing status and AGI.

Table 2: Exemption by Filing Status and Income
Filing Status AGI Exemption?
Single/Separate/Widow(er)/HoH $0 - $45,000 Full Exemption
$45,001 - $54,999 Partial Exemption
Amounts >= $55,000 No Exemption
Married Joint Filers $0 - $60,000 Full Exemption
$60,001 - $69,999 Partial Exemption
Amounts >= $70,000 No Exemption

Phaseout/Partial Exemption

The following are eligible for a partial exemption of taxable Social Security benefits:

  • Filers who are single, married filing separately, civil union filing separately, head of household, and widow(er) filers earning between $45,000-$55,000
  • Filers who are married filing jointly and civil union partner filing jointly earning between $60,000-$70,000 are eligible for a partial exemption of taxable Social Security benefits.

Here’s how the partial exemption will be calculated:

  1. Subtract the taxpayer’s AGI from the top of the exemption threshold
  • Married/CU Partners Joint Filers: $70,000 – AGI = Line 1
  • All Other Filers: $55,000 – AGI = Line 1
  1. Divide the amount from Line 1 by $10,000.
  2. Multiply the amount on Line 2 by the taxable Social Security benefit. This is the amount of the partial exemption.

Need help making the calculation? Look for the worksheet in the instructions for Form IN-111, Vermont Income Tax Return, when you file for tax year 2018. The Department will also have a calculator (Excel spreadsheet) available for the 2019 tax season.

Here’s an example:

A single filer has an AGI of $50,000 and an annual SS benefit of $32,000 for which $20,000 is taxable at the federal level. That means:

  • $12,000 of the $32,000 in Social Security benefits is already exempt at the federal and therefore state level;
  • $30,000 of this filer’s AGI is not Social Security benefits and is not subject to the exemption; and
  • the $20,000 of the Social Security benefits that becomes part of the filer’s AGI is the amount subject to an exemption. The exemption for single filers phases out between $45,000-$55,000, so this filer’s exemption is in that range.

The partial exemption is calculated as follows:

  1. Subtract the filer’s AGI from the exemption threshold of $55,000:  

55,000-$50,000 = $5,000

  1. Divide the amount from Line 1 by $10,000:

$5,000/$10,000 = 50% (or .5)

  1. Multiply the amount on Line 2 by the taxable social security benefit:

50% x $20,000 = $10,000

This filer is eligible for a 50% exemption in taxable Social Security benefits. Of the filer’s $20,000 in taxable benefits, $10,000 will therefore be exempt from the filer’s Vermont taxable income.

Additional Examples

The following two examples illustrate how the exemption is claimed: 1) in full by a head-of-household filer, and 2) in-part by a married joint filer in the phaseout range of $60,000-$70,000.

Example 1: Head of Household (HoH) Filer – Full Exemption
Example 1 is an HoH filer earning $40,000 in AGI, with an annual Social Security benefit of $16,000 for which $10,000 is taxable. Since this filer’s income is less than the $45,000-$55,000 phaseout window for HoH filers, this filer can exempt the full $10,000 of taxable Social Security benefits from taxable income.

Example 2: Married Joint Filer – Partial Exemption
Example 2 is a joint filer earning $62,000 in AGI, with an annual Social Security benefit of $32,000 for which $20,000 is taxable. Since the exemption for joint filers phases out between $60,000-$70,000, this filer would be eligible for a partial exemption.

This filer’s partial exemption is calculated as follows:

  1. Subtract the filer’s AGI from the exemption threshold of $70,000:

$70,000 - $62,000 = $8,000

  1. Divide the amount from Line 1 by $10,000:

$8,000/$10,000 = 80% (or .8)

  1. Multiply the amount on Line 2 by the taxable social security benefit:

80% x $20,000 = $16,000

This filer is eligible for an 80% exemption in taxable Social Security benefits. Of the filer’s $20,000 in taxable Social Security benefits, $16,000 will be exempt from Vermont taxable income.

Go back to taxable income. For more information, please view our press release.