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Taxable Income

Taxable income is defined in 32 V.S.A. § 5811(21) as federal taxable income reduced by the Vermont standard deduction and personal exemption(s) and modified by 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.

Use Schedule IN-112, VT Tax Adjustments and Credits to calculate additions and subtractions to taxable income.

To learn more about Vermont income tax credits and other adjustments to tax liability please see tax credits available to individuals.

Additions

Vermont follows federal treatment when taxing nonqualified stock options. This means they will usually be taxed when exercised. However, if a stock option is taxed under federal law when it is granted or vested, Vermont will also tax it at that time.

If an individual is a Vermont resident when an option becomes valued and taxable under federal law, the entire income is taxed by Vermont. The individual may claim a credit against Vermont tax for income taxes paid to a different state on that income. If an individual is a resident of a different state when an option becomes taxable under federal law, the income related to services performed in Vermont will be taxed by Vermont. The Vermont portion is determined by number of days worked in Vermont compared to the total number of days worked anywhere during the period from the option grant date to the vesting date.

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.

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. Visit the Internal Revenue Service's (IRS) website for more information about depreciation.

See 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

Subtractions

Taxable Income is always reduced by the Vermont Standard Deduction and Personal Exemption(s). The Vermont standard deduction varies based on filing status and includes additional deductions for filers age 65 and over and/or who are blind. Taxable income is further reduced by a personal exemption for each filer and dependent on the tax return.

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.

Vermont allows retirees to exclude the first $10,000 of retirement income from military, Civil Service Retirement System (CSRS), or other eligible retirement systems. Retirees are eligible for this exemption if their income falls below the thresholds for the Social Security exemption. Taxpayers may elect only one retirement exemption each tax year (Social Security or Other Retirement Income) but not both.

Pursuant to Act 71 (2019), effective January 1, 2019 for tax year 2019 and forward, creates a new deduction for medical expenses within the personal income tax.

Taxpayers will be able to deduct the amount of their itemized deduction for medical expenses taken at the federal level, minus the following:

  • the amount of the Vermont standard deduction and personal exemptions; and,

  • any amount deducted at the federal level for entrance fees or monthly payments to a continuing care retirement community, which exceeds federal deductibility limits for premiums paid on qualified long-term care insurance contracts.

See the Vermont Medical Deduction overview to learn more.

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.

For more information, see Technical Bulletin 24, Exemption of Income of U.S. Obligations.

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 Flat Exclusion is the general exclusion amount allowed for a particular tax year or the actual amount of net adjusted capital gains, whichever is less.

  • A Percentage Exclusion 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.

The Percentage Exclusion for capital gains is capped at $350,000. This means that any gain above $875,000 will be taxed at standard income tax rates. The Flat Exclusion remains at $5,000.

The amount excluded cannot exceed 40% of federal taxable income. To file for a capital gains exclusion, use Vermont Schedule IN-153, VT Capital Gains Exclusion. For more information, see the instructions on Schedule IN-153 and Reg. §1.5811.(21)(B)(ii).

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.

For more information on Vermont’s treatment of bonus depreciation read, Technical Bulletin 44, Disallowance of Bonus Depreciation Provisions of Federal Economic Stimulus Act of 2008.

Vermont resident taxpayers may fully deduct all student loan interest payments that were not already deducted from adjusted gross income (AGI) on their federal income tax return. This exemption is available to Vermont resident taxpayers with AGIs of $120,000 or less for single filers, or AGIs of $200,000 or less for joint filers.

The Federal student loan interest deduction is limited to $2,500 and is available to single filers with AGIs of $70,000 and under, and to joint filers with AGIs of $140,000 and under. The Vermont deduction allows these filers to deduct any remaining student loan interest payments beyond $2,500 from their Vermont taxable income.

For more information, see income tax information for students (coming soon).