VT’s Social Security Taxation: A Growing Concern for Retirees

As Vermont’s population ages and more residents rely on Social Security benefits, concerns over the state’s taxation policies on these benefits continue to mount. A recent report from the Joint Fiscal Office (JFO) highlights the growing financial impact of Vermont’s approach to taxing Social Security income, raising questions about its long-term sustainability and fairness.

How Social Security Is Taxed in Vermont

Vermont is one of only 10 states that tax Social Security benefits, although it offers exemptions based on income levels. While 40 states either fully exempt Social Security income from taxation or do not have an income tax at all, Vermont’s system is designed to provide relief primarily to lower-income residents.

At the federal level, only a portion of Social Security benefits are taxable, depending on a taxpayer’s “combined income.” Individuals with combined incomes below $25,000 (or $32,000 for joint filers) pay no federal taxes on Social Security benefits. In Vermont, an additional exemption is available for single filers with adjusted gross incomes (AGI) under $50,000 and married filers under $65,000. Those earning slightly above these thresholds receive a partial exemption, but Social Security benefits are fully taxed once an individual’s AGI reaches $60,000 (or $75,000 for joint filers).

This policy effectively places a heavier tax burden on middle-class retirees while fully exempting lower-income individuals from state taxation.

The Growing Number of Beneficiaries

The number of Vermonters receiving Social Security benefits has increased significantly over the past decade. According to JFO, Vermont had approximately 159,575 Social Security recipients in 2022, an 8.1% increase from 2017. More than one-third (36.3%) of the state’s adult population receives Social Security, one of the highest proportions in the country.

This growth is largely driven by Vermont’s aging population. Over the past decade, the number of retired workers collecting Social Security benefits increased by 34.5%, while other beneficiary categories—such as disability recipients—declined. The overall shift in Vermont’s demographics suggests that this trend will continue, putting increased pressure on the state’s taxation system.

Revenue from Social Security Taxation on the Rise

Despite exemptions, Vermont continues to collect substantial tax revenue from Social Security recipients. The JFO report estimates that Vermont will collect approximately $61.5 million in Social Security-related taxes in 2024, nearly double the amount collected in 2013.

While Vermont’s income tax structure is progressive, many retirees are finding themselves caught in a tax squeeze. Due to rising Social Security benefits—driven by cost-of-living adjustments—more retirees are exceeding the exemption thresholds, subjecting them to state taxation. Unlike federal benefits, Vermont’s exemption thresholds are not adjusted for inflation, meaning that each year, more retirees find themselves paying state taxes on their Social Security income.

For the nearly 87,000 Vermonters who report Social Security income on their state tax returns, only about 52% will actually pay taxes on those benefits. However, for those who do, the average tax bill is $1,327 per filer.

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How Vermont Compares to Other States

Many states that previously taxed Social Security benefits have moved away from the practice, largely in response to concerns about retiree affordability and economic competitiveness. Vermont’s approach remains one of the more stringent among the 10 states that still impose Social Security taxes.

States such as Connecticut, Kansas, and Minnesota offer more generous exemptions, with full exclusions for Social Security benefits up to income levels of $75,000 to $100,000. Meanwhile, states like Colorado and Rhode Island provide exemptions specifically for retirees over the age of 67.

Neighboring New Hampshire and Massachusetts fully exempt Social Security income, putting Vermont at a competitive disadvantage when it comes to attracting and retaining retirees.

The Policy Debate: Should Vermont Change Its Approach?

Vermont’s taxation of Social Security benefits remains a contentious issue. Supporters argue the exemptions already in place protect lower-income retirees, while the revenue helps fund essential services. However, the Joint Fiscal Office report highlights that Vermont’s exemption thresholds are not adjusted for inflation, meaning more retirees will face taxation over time.

Critics say this policy puts Vermont at a competitive disadvantage compared to the 40 states that don’t tax Social Security benefits. With an aging population and rising retirement income, some lawmakers have proposed raising exemption thresholds or indexing them to inflation. The last adjustment came in 2022, but further changes could be on the table as the state faces demographic and economic shifts.

What’s Next?

With Vermont’s retiree population growing rapidly, the state’s approach to Social Security taxation is likely to remain a hot topic. Lawmakers may consider proposals to ease the tax burden on retirees, but such measures would need to be balanced against Vermont’s overall fiscal needs.

As the state continues to grapple with demographic shifts, rising benefit payments, and an evolving tax landscape, the debate over Social Security taxation is far from over. For now, Vermont retirees will need to navigate a system that remains one of the most complex in the nation.

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Dave Soulia | FYIVT

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