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Tax Credits and Adjustments

    Credits Available to Individuals

    Tax credits are available to certain taxpayers at both the state and federal levels. A tax credit is a tax incentive which allows qualified taxpayers to reduce their tax liability to the state. Tax credits are available for individuals and businesses and provide incentives to support business growth and activities in Vermont.

    To learn more about deductions, exclusions, and other adjustments, please see Vermont taxable income.

    Vermont's Charitable Contribution Tax Credit provides a 5% credit of the first $20,000 in eligible charitable contributions made during the taxable year regardless of whether taxpayers itemize on their federal tax returns. The credit applies to charitable giving beginning with gifts made on Jan. 1, 2018. For more information, watch the video below.

    Taxpayers may take the credit using Form IN-111, Vermont Income Tax Return. This is a nonrefundable credit. A nonrefundable credit may be applied to a tax liability, but it cannot exceed the amount the taxpayer owes.

    Regarding what charitable contributions are eligible for the Vermont tax credit for the Vermont tax credit, Vermont law follows federal law 26 U.S.C. § 170 as amended by the Tax cuts and Jobs Act (TCJA) of 2017 and the relevant regulations. The Vermont Department of Taxes recommends that taxpayers consult their tax advisers and IRS guidance for information about what charitable contributions are allowed.

    It is important that taxpayers keep good records of their contributions, including receipts, canceled checks, and other documentation. Do not include documentation with tax returns. The Department may ask filers who take the credit to produce donation records.

    This tax credit encourages investment in eligible housing charities. The eligible housing charity is determined by Vermont Department of Housing and Community Development.

    Credit Amount: Difference between interest income that would have been received at charitable threshold rate and actual interest income received.

    Credit Limit: Not to exceed 3% of average outstanding principal balance of investment during taxable year. Aggregate of charitable investment allowed outstanding in any year is limited to $5 million.

    New for tax year 2022, the Vermont Child Tax Credit provides financial support to full and part-year resident Vermont families with young children. This credit of $1,000 per eligible child is fully refundable and phases out as Adjusted Gross Income (AGI) increases.

    • Credit is available for each child on the tax return who is five years old or younger at the close of the tax year.

      • For example: Thomas turns six in July of 2022. Thomas’ parent(s) will not receive a Child Tax Credit for Thomas when they file their tax year 2022 return in early 2023 because Thomas was six at the close of the 2022 tax year.

    • For part-year residents, the amount of the credit is prorated based on the amount of income earned or received while the taxpayer is a resident of the State of Vermont relative to the taxpayer’s total income.

    • Credit is reduced by $20 for every additional $1,000 in income, or fraction thereof, after the taxpayer’s AGI exceeds $125,000. The phaseout begins at the same AGI level for both single and joint filers. The credit phases out completely at $175,000 of AGI.

    Grandparents, Foster Parents or People Caring for Siblings or Other Relatives

    If you are a grandparent, foster parent, or someone who is caring for siblings or other relatives, the IRS urges you to check your eligibility to receive the Child Tax Credit. Check your eligibility with the Interactive Tax Assistant tool available on the IRS website.

    Vermont offers tax relief to full- and part-year Vermont residents who earn income and pay dependent care expenses. If you are eligible for the federal Child and Dependent Care Credit you qualify for the state tax credit.

    Credit Amount: The tax credit amount is 72% of the federal Child and Dependent Care Tax Credit.

    The Vermont Child and Dependent Care Credit is fully refundable.

    The Earned Income Tax Credit (EITC or EIC) is a benefit for working people with low to moderate incomes. To qualify, you must meet certain requirements for the federal EITC and file a Form 1040, U.S. Individual Income Tax Return, even if you do not owe any tax or are not required to file. EITC is a refundable credit that may reduce the amount of tax you owe or give you a refund.

    To qualify for EITC, you must:

    1. have earned income from working for someone or from running or owning a business or farm, and

    2. meet basic rules on income, a qualifying child, age, etc.

    If you qualify for federal EITC and are a full or part-year resident of the State of Vermont, you also qualify for Vermont EITC. Vermont EITC is 38% of the federal amount.

    To claim EITC, you must complete and file the following forms:

    This tax credit seeks to provide financial assistance to seniors and persons who are disabled with little tax-exempt retirement or disability income. If you qualify for the federal Credit for the Elderly or the Disabled, you can take the respective state tax credit. This tax credit is available to elderly or permanently and totally disabled persons who meet specific qualifications:

    Credit Amount: The Vermont tax credit is 24% of the federal Credit for the Elderly or the Disabled.

    Credit Limitation: You must be eligible for and receive the Federal tax credit.

    This credit is nonrefundable. To find out if you qualify, please contact us.

    This credit provides stability to farm operations. On your federal income tax return, you may be able to average some or all of the current year's farm income by spreading it out over the past three years. If you quality for the federal Farm Income Averaging Credit, you are eligible for the state tax credit. This credit is available to farmers who calculate Federal tax using Federal Schedule J.

    Credit Amount: The credit amount is 24% of the federal Farm Income Averaging Credit.

    Credit Limitation: You must be qualified for the federal Farm Income Averaging credit. This is a nonrefundable credit.

     

    Vermont Higher Education Investment Plan (VHEIP) also known as the Vermont 529 (VT529) Plan The purpose of this tax credit is to encourage savings for education expenses. Any U.S. citizen or resident alien, including the account holder, can be the beneficiary. The beneficiary must have a valid Social Security number or taxpayer identification number. Refer to Technical Bulletin 66, Credit for Vermont Higher Education Investment Plan for more information about claiming this tax credit.

    Credit Amount: The credit amount is 10% of the first $2,500 contributed per taxpayer per beneficiary to a beneficiary’s account. Rollovers from another state’s qualified tuition plan into VHEIP are also eligible for this tax credit at the same rate. Only the contribution portion of a rollover is eligible toward the credit, not the earnings.

    Credit Limitation: The investment must be in a 529 plan administered by Vermont Student Assistance Corporation (VSAC). This is a nonrefundable credit against Vermont personal income tax. If funds are withdrawn for any purpose other than approved postsecondary education costs, the Vermont credit claimed for the investment of those funds will be subject to repayment. This is a non-refundable credit.

    Frequently Asked Questions

    What uses of a VHEIP account trigger the 10 percent repayment penalty?

    Vermont law requires that a taxpayer who has received a credit repay 10 percent of any distribution from a VHEIP account  unless a distribution is for the allowed uses specified in law. The maximum repayment penalty cannot exceed the total tax credits received. A failure to make the repayment can result in further penalties and interest.

    The uses that do not require repayment are: (1) costs to attend approved postsecondary education institutions, (2) expenses associated with registered apprenticeship programs, (3) uses made after the death or disability of the beneficiary, and (4) uses for qualified higher education expense loan repayment pursuant to 26 U.S.C. § 529(c)(9). The loan repayment exception is limited to loans used exclusively for costs of attendance to an approved postsecondary education institution (approved postsecondary education institutions are explained in the question below). 

    Because of the exception for uses made after the disability of a beneficiary, rollovers from a VHEIP account to an Achieving a Better Life Experience (ABLE) account will not be penalized if the accounts have the same beneficiary.

    All other uses of a distribution from a VHEIP account are subject to the repayment penalty. Some of those uses include: (1) K-12 education expenses, (2) rollovers from a VHEIP account with one beneficiary to another account with a different beneficiary, (3) rollovers to another state’s college savings plan (other than to an ABLE account with the same beneficiary), and (4) rollovers to a private savings account.

    What is an approved postsecondary education institution?

    Any postsecondary education institution that is one of the following:

    • Accredited by an accrediting agency approved by the U.S. Secretary of Education pursuant to the Higher Education Act
    • A non-U.S. institution approved by the United States Secretary of Education as eligible for use of education loans made under Title IV of the Higher Education Act
    • Is a college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.

    Is a rollover from one account to another considered a distribution?

    Yes. When funds are removed from an account to complete a rollover, that removal of funds is considered a distribution. The repayment penalty will apply if funds are removed from a VHEIP account and rolled over to an out-of-state account. Vermont does not have a penalty exception for rollovers to out-of-state accounts. On the other hand, if funds are rolled over to a VHEIP account from an out-of-state account, the contribution to the VHEIP account will qualify for Vermont’s VHEIP tax credit.

    Is there a limit on the amount that can be rolled over or otherwise deposited into a VHEIP account?

    There is no limit on the amount that can be deposited into an account each year but there is a cap on the amount that qualifies for a tax credit. The tax credit received for contributions is capped at 10 percent of the first $2,500 per beneficiary per year. Contributions (including those from rollovers) can be made yearly and the cap for each year is $2,500 per beneficiary.

    Additional information can be found in Vermont Technical Bulletin 66.

    Taxpayers may have certain income that is taxed by both Vermont and the other taxing jurisdiction. If you are a Vermont resident or part-year resident and pay income tax to another state, territory, district, or province (but not city or county), Vermont allows a credit for that tax on the Vermont income tax return.

    To calculate the credit, use Schedule IN-117, VT Credit for Income Tax Paid to Other State or Canadian Province.

    If you have capital gain, business income, or made adjustments to calculate your federal adjusted gross income, see Technical Bulletin 38, Credit For Taxes Paid To Another State Or Canadian Province; Limitations.

    The purpose of this tax credit is to encourage sales of mobile home parks to their residents, or to a nonprofit organization that represents them, in order to provide stability to the mobile home park community. For more information about this tax credit, contact the Vermont Department of Housing and Community Development.

    Credit Amount: The credit amount is 7% of gain on sale of mobile home park that is subject to federal income tax for the taxable year.

    Credit Limitation: The credit limit cannot exceed Vermont tax liability, credit is nonrefundable. Unused credits may be carried forward for three years.

    If you take the federal Research and Development (R&D) credit, you may qualify for a state R&D credit on eligible expenditures made in Vermont. The Vermont credit can be taken in an amount equal to 27% of the federal tax credit allowed in the taxable year. This credit applies to personal income tax or business or corporate income tax. Any unused credit available may be carried forward up to 10 years.

    Each year, we publish a list of taxpayers who claimed this credit during the most recently completed calendar year. For more information about this tax credit, contact the Vermont Department of Taxes.

    Adjustments

    Interest and dividend income from non-Vermont state and local obligations are taxable in Vermont. A Vermont obligation is one from the state of Vermont or a Vermont municipality.

    This may have been paid directly to you or through a mutual fund or other legal entity that invests in Vermont state and local obligations. If you receive this income from a mutual fund that has only a portion of its assets invested in Vermont state and local obligations, use only the amount for the Vermont obligation(s).

    Additions to VT Tax:

    • Tax on Qualified Plans including Individual Retirement Accounts (IRA), Health Savings Accounts (HSA), and Medical Savings Accounts (MSA)
    • Recapture of Federal Investment Tax Credit
    • Lump Sum Distributions (federal return)
    • Recapture of Vermont Tax Credits
      • Recapture occurs when a previously claimed credit is changed

    Subtractions from VT Tax: