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Tax Adjustments and Credits

Tax 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:

Tax Credits

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.

Here is a list of tax credits available to individuals:

Charitable Housing Investment Credit

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.

Credit for Income Tax Paid to Another State or Canadian Province

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. This is income that is taxed by both Vermont and the other taxing jurisdiction.

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 Options for Child and Dependent Care

Vermont offers tax relief to employees who have dependent care expenses in order to stay in the workforce. Taxpayers have two options for a child and dependent care credit:

  1. Credit for Child and Dependent Care or
  2. the Low Income Child and Dependent Care Credit.

You cannot take both credits.

Credit for Child and Dependent Care

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 24% of the federal Child and Dependent Care Tax Credit.

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

Low Income Child and Dependent Care Credit

To qualify for this credit, you must meet the following criteria:

Learn more from the Agency of Human Services

Credit Amount: The tax credit amount is 50% of the federal child and dependent care tax credit

Credit Limitation: You must be eligible for and receive the Federal tax credit. This is a refundable credit.

Qualified Sale of Mobile Home Park Credit

The purpose of this tax credit is to encourage sales of mobile home parks to its 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: 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.

Research and Development Credit

If you take the federal 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.

Vermont Charitable Contribution Tax Credit

In response to the Federal Tax Cuts and Jobs Act (TCJA) of 2017, Vermont lawmakers created a nonrefundable credit of 5% on the first $20,000 of eligible charitable contributions per tax year. This credit began with the 2018 tax year and applies to the Vermont Income Tax Return. For more information, please view our press release or watch the video below.

Taxpayers making charitable donations should keep good records, including receipts, of tax-deductible contributions. Do not send receipts to the Department of Taxes. Taxpayers may be asked to provide evidence of donations later. Visit the IRS website to learn more about Recording Charitable Contributions.

Find out how to take the credit.

Vermont Earned Income Tax Credit (EITC)

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 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.

Are you eligible? 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, you also qualify for Vermont EITC. Vermont EITC is 36% of the federal amount. To claim EITC, you must complete and file the following forms:

Vermont Higher Education Investment Plan (VHEIP) also known as the Vermont 529 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 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. 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

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) and uses made after the death or disability of the beneficiary. The third exception means that 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.

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.
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.
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.