Vermont State Tax: Understanding How It Works

As one of the smallest states in the United States, Vermont has a unique taxation system that is quite different from other states. Vermont levies several taxes, including personal income tax, sales tax, property tax, and use tax. In this article, we are going to explore all these taxes and break them down for easy understanding.

Personal Income Tax

The personal income tax is levied based on a taxpayer’s income, which includes wages, salaries, tips, and any other form of income. Vermont has a progressive income tax system, which means that the higher the income, the higher the tax rate. The tax rates vary from 3.35% to 8.75%. Vermont’s tax brackets are indexed for inflation, so they change every year.

For instance, in 2021, the tax brackets are:

– 3.35% on the first $40,350 of taxable income
– 6.60% on taxable income from $40,351 to $97,850
– 7.60% on taxable income from $97,851 to $204,100
– 8.75% on taxable income over $204,100.

It’s important to note that Vermont doesn’t allow itemized deductions on its income taxes. Instead, taxpayers can claim a standard deduction, which is $12,000 for individuals and $24,000 for married taxpayers filing jointly.

Sales Tax

Vermont charges a 6% sales tax on most goods and services. There are a few exemptions to this rule, such as:

– Clothing and footwear that cost less than $110
– Food bought for home consumption
– Prescription drugs
– Medical devices
– Electricity, gas, and heating oil
– Certain services, such as car repair.

However, some services such as haircuts, massages, and pet grooming are taxable. Additionally, Vermont doesn’t have a local option to add to the state’s sales tax rate.

Property Tax

Property tax is assessed based on the value of real estate and personal property owned by a taxpayer. Vermont’s property tax rate is one of the highest in the country. The tax rate varies from municipality to municipality and can be up to 2.5% of the property’s assessed value.

However, Vermont has several programs in place to help homeowners offset the high property taxes. These programs include:

– Homestead Declaration – this is a yearly declaration that a homeowner files to claim an exemption on the first $100,000 of their property’s value.
– Homestead Property Tax Adjustment – this is a tax credit that eligible homeowners can claim to reduce their property tax burden.
– Statewide Education Tax – this is a tax that funds the state’s education system and is based on a property’s equalized value, not assessed value.

Use Tax

Use tax is levied on out-of-state purchases that a taxpayer made but didn’t pay sales tax on. For example, if a Vermont resident purchases a car in New Hampshire, where there is no sales tax, they would be liable to pay use tax on that car when they register it in Vermont.

Vermont’s use tax rate is the same as its sales tax rate, which is 6%. However, the use tax is not enforced as strictly as the sales tax, and many taxpayers may not be aware of their obligation to pay it.

Recent Changes to Vermont’s Tax Laws

In 2021, Vermont passed several tax laws that will impact taxpayers in the state. Here are some of the key changes:

– Remote Seller Sales Tax – this new law requires out-of-state retailers with more than $100,000 in annual sales to collect and remit Vermont’s sales tax on sales made to Vermont customers. This law brings Vermont’s taxation of online sales in line with the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair.
– Marijuana Sales Tax – as of July 1, 2021, Vermont levies a 14% excise tax on marijuana sales. This tax is in addition to the state’s sales tax.
– Earned Income Tax Credit – Vermont has increased its Earned Income Tax Credit to 36% of the federal credit, up from 32% in 2020. This means that eligible low-income taxpayers can claim a higher tax credit to reduce their tax liability.
– Capital Gains Tax Credit – Vermont has introduced a capital gains tax credit for investments in Vermont-based businesses. The credit is equal to 20% of the taxpayer’s investment and is capped at $125,000 per taxpayer per year.

Conclusion

Vermont’s tax system is complex, with multiple taxes that taxpayers need to understand. While Vermont has some of the highest tax rates in the country, it also has several programs in place to help homeowners offset the high property tax burden. Additionally, recent changes to Vermont’s tax laws, such as the introduction of a remote sales tax and a credit for investments in Vermont businesses, will impact taxpayers in the state. As always, taxpayers are advised to consult with a tax professional for specific advice on their tax situation.

The total tax burden in Vermont is 10.2%, which is slightly higher than the national average of 9.8%.  Like other states, there are excise taxes of liquor, beer and cigarettes, as well as vehicle taxes.  There are also municipal property taxes that must be given consideration.  Tax returns are due on April 15.

Vermont state sales tax – 6%, (exemptions include medical supplies, food, equipment and fuel, residential fuel and electricity, clothing and shoes under purchase price of $110).  Local areas may add up to 1%.  There is a 9% tax on prepared foods/restaurant meals and 10% on alcoholic beverages served in restaurants.

Vermont personal income tax

There are five tax brackets and the brackets are doubled for married couples:

– 3.55 percent on the first $34,000 of taxable income.

– 6.8 percent on taxable income between $34,001 and $82,400.

– 7.8 percent on taxable income between $82,401 and $171,850.
– 8.8 percent on taxable income between $171,851 and $373,650.

– 8.95 percent on taxable income of $373,651 and above.

The Vermont tax rate is top heavy and has low income earners paying a comparatively low tax rate.

Vermont excise taxes

Taxes will be assessed on vehicles, alcohol, tobacco, gasoline and are in addition to federal excise taxes.

– $2.24 per package of 20 cigarettes

– $.68/gallon on spirits

– $.55 per gallon on table wine

– $.2565 per gallon of beer

– $.245/gallon on gasoline

Vermont inheritance/estate tax

There is no Vermont inheritance tax.  Vermont estate taxes are unrelated to federal laws and imposes its own estate tax, unlike other states.  As of 2009, tax returns are required for estates exceeding 3.5 million dollars.  The value of the estate assesses the assets, insurance policies and trusts of the deceased.

Vermont payroll taxes

State Disability Insurance – none

State Unemployment Insurance – the state uses a benefit ration formula with rates varying from 1.3% and 8.4% on $13,000 base salary.  Construction employers have a rate of 3%, specialty trade contractors have a rate of 3.9% and all other pay 1%.

State minimum wage is 8.15/hr

Vermont state property tax

Vermont property taxes fund educational and municipal services.  There is a homestead exemption and the form need only be filed once, unless the taxpayer moves to a new home or changes in the use of the property.  There are considerations for income when calculating the property tax through a calculator unique to Vermont.

There is a statewide education tax for all properties which accrues at $1.35 per $100 or $.86 per $100 of assessed value, multiplied by the district spending adjustment.

Vermont state corporate tax

The Vermont corporate tax structure has three brackets:

– 6%  for gross profits less than 10k

– 7% for profits between 10 – 25k

– 8.5% for profits above 25k

There are tax incentives available that offset these corporate taxes.

Exemptions

The only retirement income exempt from taxation are Railroad Retirement benefits, all others, including out of state pensions are taxed at the typical rate.

Disability and VA benefits are largely exempt from both federal and state taxation.