Vermont's tax treatment of SSDI

Vermont does not tax Social Security Disability Insurance (SSDI) benefits. This means the state will not take a portion of your monthly SSDI payment, regardless of how much you receive or what other income you have.

However, your SSDI may still be taxed at the federal level. Vermont's decision to exempt SSDI from state income tax is separate from whether the Internal Revenue Service (IRS) will tax your benefits. The two are independent — you could owe federal tax on SSDI while owing nothing to Vermont.

If you live in Vermont and receive SSDI, you only need to worry about federal taxation of your benefits, not state taxation. This is one of the clearer parts of the tax picture for SSDI recipients in Vermont.

Key Takeaways

  • Vermont does not tax SSDI benefits at the state level, so your monthly payment is not reduced by Vermont income tax.
  • Federal taxation of SSDI is separate from state taxation, and you may still owe federal tax even though Vermont taxes nothing.
  • Whether you owe federal tax on SSDI depends on your total income and filing status, not on where you live.
  • You will report any federal tax owed on SSDI when you file your federal income tax return with the IRS.

How federal taxation of SSDI works in Vermont

Even though Vermont does not tax your SSDI, the IRS may. Federal taxation of SSDI depends on your combined income — a calculation that includes your SSDI, wages, interest, dividends, and other sources. The IRS uses a formula to determine how much of your SSDI, if any, becomes taxable.

If your combined income is below a certain threshold, you owe no federal tax on your SSDI. If it exceeds that threshold, up to 50 percent or 85 percent of your benefits may become taxable, depending on how far above the threshold you go. These thresholds are the same for all states, including Vermont.

The threshold amounts do not change based on where you live. A Vermont resident with the same income as someone in another state will have the same federal tax obligation on SSDI.

What counts as income for the SSDI tax calculation

The IRS counts several types of income when deciding whether your SSDI is taxable. Wages from work, self-employment income, interest, dividends, capital gains, and rental income all count. Some forms of income — like certain municipal bond interest — do not count.

Other Social Security benefits, such as retirement benefits or spousal benefits, also count toward the combined income threshold. If you receive both SSDI and another form of Social Security, both are included in the calculation.

Supplemental Security Income (SSI) does not count as income for this purpose. If you receive SSI instead of SSDI, or in addition to SSDI, the SSI portion is not included in the combined income calculation.

Filing taxes in Vermont when you receive SSDI

You file your federal income tax return with the IRS the same way whether you live in Vermont or anywhere else. Vermont does not require a separate state return for SSDI income because the state does not tax it.

However, Vermont does tax other income — wages, interest, and dividends. If you have income from work or investments in addition to SSDI, you may owe Vermont state tax on that other income. You would report those earnings on Vermont's state income tax return.

The Social Security Administration sends you a form called SSA-1099 each January if your SSDI was paid during the previous year. You use this form to report your SSDI on your federal return. You do not need to report SSDI separately to Vermont.

Other Vermont benefits and SSDI

Some Vermont residents who receive SSDI may also be may be able to access for state benefits like Medicaid or fuel information. These programs have their own income limits and rules, and they count SSDI as income when determining whether you may have access to.

Vermont's decision not to tax SSDI does not mean the state ignores it. For purposes of determining whether you meet income thresholds for other information programs, Vermont counts your full SSDI amount as income. Losing the tax burden does not increase your benefits or change your may be able to access for other programs.

Planning for federal taxes on SSDI in Vermont

If you expect your combined income to be high enough that some of your SSDI becomes taxable, you have options. You can request that the Social Security Administration withhold federal income tax directly from your monthly SSDI payment. This way, you pay the tax gradually throughout the year rather than owing a large amount when you file.

To set up withholding, you complete Form W-4V and send it to your local Social Security office. You can choose to have 7 percent, 10 percent, 15 percent, or 25 percent of your benefit withheld each month. Many people find this easier than calculating what they owe at tax time.

If you do not set up withholding and you owe federal tax on your SSDI, you can pay it when you file your return. Some people make quarterly estimated tax payments to the IRS instead. A tax professional can help you decide which approach works best for your situation.

Frequently Asked Questions

Do I have to file a Vermont state tax return if I only receive SSDI?

No. If SSDI is your only income, you do not owe Vermont state tax and do not need to file a Vermont return. However, you may still need to file a federal return with the IRS depending on your combined income and filing status.

Will Vermont take money from my SSDI for back taxes or child support?

Vermont does not tax SSDI, so the state cannot take SSDI for state income tax debt. However, federal offsets for child support, spousal support, or federal student loans can reduce your SSDI payment. These are federal actions, not Vermont actions.

If I move to Vermont from another state, does my SSDI tax situation change?

Your federal tax situation does not change. However, if you previously lived in a state that taxed SSDI, you will no longer owe that state's tax on your benefits. You may owe Vermont tax on other income like wages or interest, depending on the amount.

What if I have both SSDI and a job in Vermont?

Your wages are taxed by Vermont and the IRS. Your SSDI is not taxed by Vermont but may be taxed by the IRS depending on your combined income. Report your wages on both your Vermont and federal returns, and your SSDI on your federal return only.

Can I deduct SSDI on my taxes because Vermont doesn't tax it?

No. SSDI is not deductible on federal taxes. Vermont's decision not to tax it does not create a deduction or credit. You report SSDI as income on your federal return if your combined income exceeds the threshold, even though Vermont taxes nothing.