Vermont, with its picturesque landscapes, tight-knit communities, and easy-going lifestyle, is a paradise for many. However, when it comes to taxes, things may seem a bit complicated, especially for those new to the state. Vermont's tax laws are unique and can be daunting for individuals and small business owners who are not familiar with them.
For anyone who wants to navigate Vermont's complex tax laws, expert advice is essential. In the following article, we will provide comprehensive information on Vermont's tax laws and offer expert advice on how to manage tax liabilities.
An Overview of Vermont's Tax System
Before diving into the nitty-gritty of Vermont's tax system, let's take a broad look at the tax structure of the state. Let's first talk about the types of taxes that individuals and businesses are responsible for to the state of Vermont.
1. Income Tax: Vermont's income tax system is progressive and divided into five tax brackets. The state income tax rate ranges from 3.35% to 8.75% (as of 2021), depending on the income level.
2. Property Tax: Vermont's property tax is assessed annually on real and personal property according to its estimated fair market value. The average effective property tax rate in Vermont is 1.80%, which is slightly higher than the national average.
3. Sales Tax: Vermont has a statewide sales tax of 6%, with some cities implementing an additional 1% local option tax.
4. Use Tax: Vermont uses the use tax to collect taxes on purchases made outside the state that would otherwise be subject to the sales tax.
5. Estate Tax: Vermont's estate tax is imposed on the transfer of property at death. The exemption amount for 2020 and 2021 is $4.25 million per individual.
Navigating Vermont's Income Tax System
Vermont's income tax system is progressive. That means the more income one earns, the higher the tax rate. The state income tax rate ranges from 3.35% to 8.75%. However, not all income is subject to Vermont state tax.
a. Taxable Income
To determine taxable income, Vermont first defines total income and adjusts it for several deductions and exemptions. The deductions are those expenses that can be reduced from the total income to arrive at the taxable income. The Vermont-specific allowable deductions are included in the Vermont Adjustments to Federal Adjusted Gross Income (VTI), which must be used to calculate Vermont taxable income.
The items referred to as adjustments reduce taxable income from the federal adjusted gross income (Form 1040, line 11) to the Vermont adjusted gross income. Examples include:
1. The Vermont standard and itemized deductions.
2. Interest on U.S. government securities.
3. Income from qualifying bonds and other obligations issued by the Vermont state and municipal authorities.
4. Contributions to Vermont Plans, excluding the Vermont Higher Education Investment Plan.
5. Contributions to Vermont's 529 college savings plans.
b. Exemptions
In 2021, the Vermont per-person exemptions are $4,000. Exemptions are also allowed for the taxpayer, the taxpayer's spouse if filed jointly, and dependents. Taxpayers may also claim a credit of up to $3,000 per child for childcare expenses.
c. Credits
Vermont taxpayers can claim several credits against their tax liability to reduce the total tax bill. These credits include:
1. Property Tax Credit
The Property Tax Credit can reduce the tax liability for homeowners or renters who pay property taxes. The credit maximum for homeowners is $8,000, and for renters, it is $4,000.
2. Earned Income Tax Credit
Vermont's Earned Income Tax Credit (EITC) is a refundable credit that helps low-to-moderate income earners offset the state income tax they owe. The credit ranges from 3.5% to 32% of the taxpayer's federal EITC, depending on the income.
3. Child Tax Credit
Vermont taxpayers with income at or below $125,000 (Single) or $250,000 (Married Filing Jointly) are eligible for the state Child Tax Credit, which ranges from $110 to $2,160 per child, depending on the family's income.
Navigating Vermont's Property Tax System
Vermont's property tax system assesses taxes annually on real and personal property according to their estimated fair market value. The property tax rate varies depending on the municipality in which the property is located.
a. Property Valuation
The fair market value of a property is determined each year by the town assessor. The assessor considers factors such as location, size, and condition of the property. Property owners can only challenge their property valuation in Vermont by appealing to the Board of Civil Authority.
b. Property Tax Rates
Each municipality sets its property tax rate based on its budgetary needs after obtaining local voters' approval. Property taxes vary from city to city, and the statewide average property tax rate is 1.80%.
c. Property Tax Exemptions
Vermont provides several property tax exemptions to qualifying individuals to reduce their property tax burden.
1. Homestead Property Tax Exemption
The Homestead Property Tax Exemption is available to Vermont residents who own and occupy an eligible property as their primary residence. It exempts a portion of the property's value (currently, the first $375,000 of the fair market value) from property taxes. Vermont taxpayers may claim only one homestead property tax exemption.
2. Property Tax Adjustment
Residents of Vermont may claim a property tax adjustment by filing Form HI-144. The adjustment program reimburses taxpayers for some or all of the property tax they paid, depending on the household income.
Navigating Vermont's Sales and Use Tax System
Vermont has a statewide sales tax rate of 6%. Some municipalities may impose an additional local option tax of 1%.
a. Sales Tax Exemptions
Vermont does not impose sales tax on the sale of prescription drugs or unprepared foods. Additionally, sales and use tax exemptions are available for various entities, such as non-profit organizations and government entities.
b. Use Tax
Vermont uses the use tax to collect taxes on purchases made outside the state that would otherwise be subject to the sales tax. Individuals who make out-of-state purchases and do not pay sales tax on those items are required to report and pay the use tax.
Navigating Vermont's Estate Tax System
Vermont imposes an estate tax on the transfer of property at death. The estate tax applies to the value of the gross estate in excess of the state exemption amount. The exemption amount for 2021 is $4.25 million per individual. The estate tax rate for Vermont is graduated and starts at 0.8% and can climb as high as 16%.
Expert Advice on Navigating Vermont's Complex Tax Laws
Now that we've taken a comprehensive look at Vermont's tax laws, it's time to provide some expert advice on how to navigate them. Here are some tips:
1. File on Time
Filing taxes on time can help taxpayers avoid costly penalties. Vermont requires taxpayers to file their state income tax returns by April 15th of each year, the same as the federal deadline.
2. Take Advantage of Credits and Exemptions
Vermont offers several tax credits and exemptions to help taxpayers reduce their overall tax liability. Therefore, it's essential to take advantage of all the credits and exemptions available to you.
3. Seek Professional Assistance
Navigating Vermont's complex tax laws can be challenging, even for the most informed taxpayers. Therefore, it's advised to seek professional assistance to ensure compliance with tax laws and optimize tax savings.
4. Plan Ahead
Tax planning is key to minimizing your tax bill and ensuring compliance with Vermont's tax laws. Therefore, it's vital to plan ahead and work with tax professionals to identify ways to optimize tax savings.
Conclusion
Vermont's tax laws are complex and unique, and navigating them can be challenging. However, with the right information, taxpayers can make informed decisions and navigate Vermont's tax laws with ease. By taking advantage of the tax credits and exemptions available, seeking professional assistance, and planning ahead, individuals and small business owners can optimize their tax savings and comply with Vermont's tax laws.
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