Vermont taxes for early retirees: high rates and a Social Security break that melts by $80,000

By Tom, CPA · Updated October 29, 2026

TL;DR: Vermont taxes IRA, 401(k), pension and investment income at 3.35% to 8.75% (2025 schedules). Social Security is fully exempt only up to $70,000 of joint AGI ($55,000 for others) and phases out by $80,000 ($65,000). Homeowners under $115,400 of household income may get a property tax credit, and estates over $5 million pay 16%.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Vermont has maple syrup, covered bridges, a suspicious number of cows per capita and a top income tax rate of 8.75%. It also has one of the narrowest Social Security exemptions in the country: a married couple keeps the full break only up to $70,000 of AGI, and it's gone at $80,000. For a FIRE household that's not a cliff so much as a steep ski slope with a moose at the bottom.

This guide covers Vermont's brackets (latest published: 2025), what's taxed, the Social Security phase-out and its effective marginal rate, the small public pension exclusions, the property tax credit, the estate tax and residency. Our guides are Frugal Fran, who heats with wood she split herself, and Lavish Larry, who bought a "farmhouse" with a heated driveway.

CPA Warning Label: In Vermont's Social Security phase-out range, each extra $1,000 of income can cost a couple with $30,000 of taxable benefits about $134 of state tax.

The brackets: 3.35% to 8.75% (2025 figures)

The latest published Vermont rate schedules are for tax year 2025; 2026 schedules weren't out as of October 29, 2026, so confirm on the state's current forms.

Married filing separately uses $41,250, $99,725 and $152,000. Taxable income under $75,000 uses Vermont's tax tables, which can differ from the schedule by a few dollars.

There's also a minimum tax in the footnotes: if AGI is over $150,000, your tax is the greater of the schedule amount or 3% of AGI (less interest from U.S. obligations). A big Roth conversion year can trip it.

For 2025 the standard deduction is $7,650 single or married filing separately, $11,450 head of household and $15,300 married filing jointly, and the personal exemption is $5,300 per person. If you're 65 or older or blind and get the extra federal standard deduction, Vermont adds $1,250 per box checked for 2025 (per the department's filing-season FAQ and the 2025 IN-111).

What Vermont taxes: nearly everything

Vermont starts with federal AGI. IRA and 401(k) withdrawals, private pensions, Roth conversions, interest and dividends are taxed at regular rates. Vermont has a limited, capped exclusion for certain long-term capital gains with its own rules, so don't assume a large index-fund sale gets special treatment.

Retirement-specific breaks; you can claim only one of the first three (military retirement is separate):

• Social Security exemption (next section).
• Civil Service Retirement System (CSRS): the first $10,000 of CSRS income can be excluded below income limits.
• Other public retirement systems: the first $10,000 of U.S. or state government pension income based on earnings not covered by Social Security, below income limits.
• Military retirement and survivor benefits: under Act 71 of 2025, starting with tax year 2025 they're fully exempt with AGI of $125,000 or less, partly exempt up to $175,000, and no longer force you to choose among retirement exemptions.

Act 71 also raised the income thresholds for the CSRS and other public-pension exclusions by $5,000, so use the Schedule IN-112 worksheet for the year you file. A private-sector FIRE retiree living on a 401(k) won't qualify for the pension exclusions anyway.

The Social Security exemption and its steep slope

Under 32 V.S.A. 5830e, Vermont excludes federally taxable Social Security as follows:

In the phase-out range, the excluded share is (top of range minus AGI) divided by $10,000, times your taxable benefits. Heads up: the department's seniors page still shows older thresholds ($65,000 to $75,000 joint, $50,000 to $60,000 for others), while its Social Security page and the statute show the figures above. We use the statute.

Because the exclusion shrinks by 10% of taxable benefits for every $1,000 of AGI, a couple with $30,000 of taxable benefits loses $3,000 of exclusion per extra $1,000 of income. At the 3.35% rate that's $100.50 of extra tax on top of the $33.50 on the $1,000 itself, an effective marginal rate of about 13.4%.

Illustration: $5,000 more IRA, $670 more Vermont tax

Fran and her spouse are 67 and file jointly. They have $30,000 of federally taxable Social Security plus IRA withdrawals. We use 2025 rules and the rate schedule, and ignore the age-65 add-on to keep it simple.

Case 1: $40,000 IRA, AGI $70,000. Full $30,000 exemption. Taxable income: $70,000 - $30,000 - $15,300 standard deduction - $10,600 (two $5,300 exemptions) = $14,100. Tax: 3.35% x $14,100 = $472.35.

Case 2: $45,000 IRA, AGI $75,000. Exemption: ($80,000 - $75,000) / $10,000 = 0.5, times $30,000 = $15,000. Taxable income: $75,000 - $15,000 - $15,300 - $10,600 = $34,100. Tax: 3.35% x $34,100 = $1,142.35.

The extra $5,000 of IRA income cost $670 of Vermont tax, or 13.4%. At $80,000 of AGI the exemption is gone entirely. The FIRE fix is timing: do Roth conversions and big withdrawals before claiming Social Security, then keep joint AGI at or under $70,000 once benefits start, or take the hit on purpose. See the Roth conversion ladder timeline and the tax torpedo guide, which stacks on top of this.

Property tax: the homestead system and the credit

Vermont property tax has a state education portion and a municipal portion, and owner-occupants file a Homestead Declaration (Form HS-122) each year. The Property Tax Credit helps homeowners with household income up to $115,400 for 2025 ($115,000 for 2024). The maximum credit is $5,600 for the education portion and $2,400 for the municipal portion.

To qualify you must be domiciled in Vermont all year, own and occupy the home as your homestead on April 1, not be someone's dependent, and file the HS-122 with Schedule HI-144. Household income includes items such as nontaxable Social Security, so it can be higher than AGI. For a lean FIRE household with modest income, this credit can be worth real money; Larry and his heated driveway are on their own.

Estate tax: $5 million, flat 16%

Vermont's estate tax applies to the Vermont taxable estate above $5 million at a flat 16%. That's far below the federal exemption, so a successful FIRE couple with a paid-off home and a large brokerage account should plan for it.

A Vermont withdrawal strategy

Vermont's Social Security phase-out turns sequencing into a real lever:

• Before Social Security: the exemption doesn't matter yet, so this is when to do Roth conversions, ideally inside the 3.35% bracket ($82,500 of taxable income for couples on the 2025 schedule).
• After Social Security starts: try to keep joint AGI at or under $70,000 so the whole benefit stays exempt, using Roth withdrawals and taxable-account principal to cover spending above that.
• If you can't stay under: the damage stops at $80,000 joint AGI. Above that, you're back to the plain bracket rate, so a deliberately big year can be better than several medium ones inside the phase-out.

Remember the property tax credit uses household income, not AGI, so Roth withdrawals that don't count toward AGI may still count there. Check the HI-144 instructions.

Residency, estimates and the neighbors

Vermont taxes residents on all income. Snowbirds who keep a Vermont home and winter elsewhere should read the residency change guide and track their days. If withholding won't cover your tax, make quarterly estimated payments on Form IN-114; the department notes the Social Security Administration doesn't withhold Vermont tax from benefits.

Compare with the Massachusetts, New York and Pennsylvania guides, or run the state tax move calculator.

Everything here comes from Vermont Department of Taxes publications and Vermont statutes as of October 29, 2026. This is general education, not personalized advice.