Vermont — Personal Income Tax

Vermont requires individuals, trusts, and estates to file a state income tax return if they are required to file a federal income tax return and meet one of three conditions: (1) earned or received more than $100 of Vermont income, (2) earned or received more than $1,000 in gross income from Vermont sources listed in 32 V.S.A. § 5823(b)(1)–(6) (whether or not a resident), or (3) have a tax liability under Vermont's personal income tax chapter. This filing obligation applies to residents, part-year residents, and nonresidents who earned Vermont income.

The return must be filed on or before the date the federal income tax return is originally due, or by an extended due date granted by the Commissioner under 32 V.S.A. § 5868.

Source: 32 V.S.A. § 5861

Vermont imposes a progressive income tax on individuals, estates, and trusts with rates and brackets specified in statutory tables that are adjusted annually for inflation using the Consumer Price Index. The statute establishes four marginal tax rate brackets with income thresholds that vary by filing status: married individuals filing joint returns and surviving spouses receive the widest brackets, followed by heads of household, unmarried individuals, married individuals filing separate returns, and estates and trusts. Practitioners should consult the current-year rate schedules published by the Vermont Department of Taxes for specific dollar thresholds and applicable rates.

Source: 32 V.S.A. § 5822

Vermont personal income tax begins with federal adjusted gross income (AGI) as the tax base for individuals. The statute defines "taxable income" as federal AGI determined without regard to federal bonus depreciation (26 U.S.C. § 168(k)), increased by certain additions such as interest from non-Vermont state and local obligations, and decreased by specified subtractions including Vermont's standard deduction, personal exemptions, and capital gains exclusions. This definition applies to tax years beginning on or after January 1, 2018; prior tax years used federal taxable income as the starting point.

Source: 32 V.S.A. § 5811(21)

An individual qualifies as a Vermont resident for personal income tax purposes during any part of the taxable year in which either (1) the individual is domiciled in Vermont, or (2) the individual maintains a permanent home in Vermont and is physically present in the state for more than 183 days of the taxable year. Domicile means the place where an individual has a true, fixed, permanent home and to which place, whenever absent, the individual has the intention of returning. Part-year residents are taxed as residents only for the portion of the year during which they meet one of these two tests.

Source: 32 V.S.A. § 5811(11) and Vermont Reg. § 1.5811(11)(A)(i)

Vermont taxes nonresident individuals, estates, and trusts on six specific categories of Vermont-source income, as enumerated in 32 V.S.A. § 5823(b). A nonresident must include each category in Vermont income to the extent it is required to be included in federal adjusted gross income (or gross income for estates and trusts).

The six statutory categories are:

1. Rents and royalties derived from the ownership of property located within Vermont.

1. Gains from the sale or exchange of property located within Vermont.

1. Wages, salaries, commissions, or other income received with respect to services performed within Vermont. The statute excludes military pay for full-time active duty with the U.S. Armed Services, funds received through the federal Armed Forces Educational Loan Repayment Program under 10 U.S.C. chapters 109 and 1609, and (subject to an AGI limit) the first $2,000 of military pay for unit training in Vermont by National Guard and U.S. Reserve personnel.

1. Business, trade, occupation, or profession income to the extent the business, trade, occupation, or profession is carried on within Vermont. This includes compensation received (A) under an agreement not to compete with a business operating in Vermont, and (B) for goodwill associated with the sale of a Vermont business.

1. Deferred compensation that was previously deferred under a nonqualified deferred compensation plan and that would have been included in Vermont income if it had not been deferred, plus income derived from such previously deferred income.

1. Vermont lottery proceeds from any Vermont state lottery, tri-state lottery, or multijurisdictional lottery ticket paid to a person who purchased the ticket in Vermont, including payments received from a third party for the transfer of rights to future proceeds; the Commissioner may require withholding from lottery payments.

Business income apportionment: For category (4), when a nonresident's business, trade, occupation, or profession is carried on in Vermont and at least one other jurisdiction, Vermont applies an apportionment methodology. Beginning with tax years starting on or after January 1, 2023, Vermont uses a single sales factor apportionment calculation (replacing the prior three-factor method) to allocate apportionable business income to Vermont, consistent with the corporate income tax apportionment regime. Market-based sourcing for services and intangibles has been in effect since January 1, 2020, under 32 V.S.A. § 5833 and Vermont Regulation § 1.5833. Nonresident individuals with multistate business income typically use Schedule BI-477 to calculate the Vermont apportionment percentage.

Web-hosting safe harbor: Under 32 V.S.A. § 5823(d), Vermont income does not include income of a nonresident from certain web-related activities that, standing alone, would not constitute nexus: ownership of data or programming code in Vermont, ownership of or receipt of services from computer servers in Vermont, or receipt of computer processing or web hosting services from a Vermont provider. Income received through a partnership, LLC, or trust is also excluded if the entity's Vermont activities are limited to these enumerated activities plus activities necessary to create or maintain a website.

Services sourced by physical performance: The statute sources wages, salaries, commissions, and "other income" under category (3) based on where services are performed—inside Vermont. The Vermont Department of Taxes has clarified that for a nonresident employee who lives out of state but whose employer is in Vermont, income earned while working remotely at the employee's home location outside Vermont is not Vermont-source income and is not subject to Vermont income tax, even though the employer is located in Vermont.

Source: 32 V.S.A. § 5823 Source: 32 V.S.A. § 5833 Source: Vermont Dept. of Taxes, Nonresident with Earned Vermont Income Source: Schedule BI-477 Instructions (2023)

Vermont starts with federal adjusted gross income (federal AGI) as the starting point for calculating taxable income, then applies state-specific additions and subtractions enumerated in 32 V.S.A. § 5811(21). The statute specifies that federal AGI is determined "without regard to" federal bonus depreciation under 26 U.S.C. § 168(k), meaning Vermont requires separate timing for depreciation deductions. Taxpayers report these modifications on Schedule IN-112.

Additions to federal AGI

Under 32 V.S.A. § 5811(21)(A), Vermont requires individuals to increase federal AGI by the following items, to the extent such income is excluded from federal AGI:

1. Interest income from non-Vermont state and local obligations — 32 V.S.A. § 5811(21)(A)(i). Interest from bonds or obligations issued by states other than Vermont, or by political subdivisions of other states, must be added back.

1. Dividends or other distributions attributable to non-Vermont obligations — 32 V.S.A. § 5811(21)(A)(ii). To the extent distributions from any fund are attributable to non-Vermont state or local obligations, they must be added back.

Subtractions from federal AGI

Under 32 V.S.A. § 5811(21)(B), Vermont allows individuals to decrease federal AGI by the following items, to the extent such income is included in federal AGI:

1. Income exempted from state taxation under federal law — 32 V.S.A. § 5811(21)(B)(i). This category includes interest income from obligations of the United States, which federal law preempts states from taxing. The statute does not define the full scope of this category beyond federal preemption.

1. Adjusted net capital gain income — 32 V.S.A. § 5811(21)(B)(ii). The statute permits a subtraction calculated under one of two alternatives (the taxpayer elects which to use):

• First $5,000 of adjusted net capital gain income, where "adjusted net capital gain" has the meaning in 26 U.S.C. § 1(h), or

• Forty percent of adjusted net capital gain income from the sale of assets held by the taxpayer for more than three years, except gains from:
• (I) any real estate (or portion thereof) used by the taxpayer as a primary or non-primary residence;
• (II) depreciable personal property other than farm property and standing timber; or
• (III) stocks and bonds publicly traded or traded on an exchange, or any other financial instruments, regardless of whether sold by an individual or business.

The statute caps the total decrease under subdivision (ii) at "40 percent of federal taxable income or $350,000.00, whichever is less." For tax years beginning on or after January 1, 2018, when the tax base switched from federal taxable income to federal AGI, practitioners should note that the cap references "federal taxable income," which may create an interpretive question about how to apply the cap under the current AGI-based regime.

1. Recapture of state and local income tax deductions — 32 V.S.A. § 5811(21)(B)(iii). To the extent a state or local income tax refund or credit is included in federal AGI because it was deducted in a prior year, the taxpayer subtracts the portion that was not taken against Vermont income tax.

1. Social Security and certain retirement income — 32 V.S.A. § 5811(21)(B)(iv). The statute allows a subtraction for "the portion of certain retirement income and federally taxable benefits received under the federal Social Security Act that is required to be excluded under section 5830e of this chapter." Section 5830e is cross-referenced for the operative exclusion rules and income thresholds; the statute does not spell out those thresholds in § 5811(21)(B)(iv) itself.

1. Federal deductions disallowed for cannabis businesses — 32 V.S.A. § 5811(21)(B)(v). The statute permits a subtraction equal to "the amount of any federal deduction or credit that the taxpayer would have been allowed for the cultivation, testing, processing, or sale of cannabis or cannabis products as authorized under 7 V.S.A. chapter 33 or chapter 37" but for federal prohibition. The subtraction restores Vermont deductibility for state-legal cannabis activity.

1. Student loan interest — 32 V.S.A. § 5811(21)(B)(vi). Vermont allows a subtraction for interest paid on qualified education loans, subject to two conditions:

• The interest must not have been deducted from federal adjusted gross income (i.e., it was not claimed as an above-the-line federal deduction), and
• The taxpayer must be a "qualified resident taxpayer," which subdivision (29) of § 5811 defines as a Vermont resident whose adjusted gross income is equal to or less than $120,000 (for single, head of household, or married filing separately) or $200,000 (for married filing jointly).

The statute cross-references 26 U.S.C. § 221(d) for the definitions of "qualified education loan" and "eligible educational institution."

Other adjustments referenced in practice

Schedule IN-112 includes additional line items for adjustments such as "adjustment for prior years' bonus depreciation" and a medical expense deduction available under 32 V.S.A. § 5811(21)(C)(iv). The latter subdivision allows itemizers to subtract an amount equal to the federal medical expense deduction under 26 U.S.C. § 213, minus the Vermont standard deduction and personal exemptions taken, minus amounts attributable to continuing care retirement community fees exceeding qualified long-term care insurance deductibility limits. Practitioners should consult the current-year Schedule IN-112 instructions for computational guidance on these and other subtractions not fully detailed in the definitional statute.

After these modifications, Vermont subtracts its own standard deduction and personal exemption amounts (defined separately in § 5811) to arrive at Vermont taxable income, which is then subject to the progressive rate tables in 32 V.S.A. § 5822.

Source: 32 V.S.A. § 5811(21) Source: Vermont Dept. of Taxes, Taxable Income