Taxable income is defined in 32 V.S.A. § 5811(21) as federal taxable income with certain additions and subtractions. For information on income that is taxable and nontaxable at the federal level, see IRS Publication 525, Taxable and Nontaxable Income.
Income from Non-Vermont State and Local Obligations
Interest and dividend income from non-Vermont state and local obligations are taxable in Vermont and must be included in your Vermont taxable income. This may have been paid directly to you or through a mutual fund or other legal entity that invests in state and local obligations outside of Vermont.
Use Schedule IN-112, VT Tax Adjustments and Credits to calculate income.
Bonus Depreciation Allowed Under Federal Law Depreciation
Vermont does not recognize the bonus depreciation allowed under federal law. Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. See the IRS website for more on depreciation.
Read Technical Bulletin 44, Disallowance of Bonus Depreciation Provisions of Federal Economic Stimulus Act of 2008, for information on calculating the amount to add back to taxable income.
State and Local Income Tax Addback
While you are allowed a deduction on your federal income tax returns for state and local taxes paid, Vermont does not allow this deduction. If you took this deduction at the federal level, you must add the amount back into your Vermont income.
To calculate the addback, use Schedule IN-155, Federal Itemized Deductions Addback.
For tax year 2014 or previous: You are allowed the deduction for the first $5,000 on your Vermont Income Tax Return. To calculate your addback subtract $5,000 from your federal deduction.
Social Security Exemption
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. For more information, see the Social Security Exemption Overview.
Interest Income from U.S. Obligations
Interest income from U.S. government obligations, such as U.S. Treasury bonds, bills, and notes, is exempt from Vermont tax under the laws of the United States. Read Technical Bulletin 24, Exemption of Income of U.S. Obligations, for more information.
Capital Gains Exclusion
Vermont allows a portion of net adjusted capital gains, as defined by IRS Section 1(h), to be excluded from Vermont taxable income. Qualified Dividends are not eligible for capital gains treatment for Vermont tax purposes. You may elect to take either the Flat Exclusion or the Percentage Exclusion. The amount excluded under either method cannot exceed 40% of federal taxable income.
Is the general exclusion amount allowed for a particular tax year or the actual amount of net adjusted capital gains, whichever is less.
Allows you to you exclude up to 40% of your adjusted net capital gain from the sale of assets held for more than three years. Only certain categories of capital gain income are eligible for this exclusion.
Adjustment for Bonus Depreciation on Prior Year Property
If you claimed bonus depreciation in the previous year, you can subtract the difference between the Modified Accelerated Cost Recovery System (MACRS) depreciation and federal depreciation from your federal tax return.