Vermont 2026 Tax Changes — What Residents & Business Owners Must Know
On January 1, 2026, major federal tax changes begin as key provisions of the Tax Cuts and Jobs Act (TCJA) expire and new rules continue under the One Big Beautiful Bill Act (OBBBA).
Vermont residents — who pay a progressive state income tax based on federal AGI — will experience these federal changes directly.
- W-2 earners in Burlington, South Burlington, Rutland, Essex, Colchester, Bennington
- Healthcare, education, public-sector, and service workers
- Contractors, freelancers, and small business owners
- Real estate investors and landlords
- Short-term rental hosts, especially in ski and vacation areas
- Families with children
- Retirees drawing taxable income
- Dual-income households
Below is the complete Vermont-focused overview of the 2026 tax changes.
Key 2026 Federal Changes Affecting Vermont
Standard Deduction Shrinks
TCJA temporarily increased the standard deduction.
OBBBA did not extend it.
- Single: ~$8,300
- Married Filing Jointly: ~$16,600
- Head of Household: ~$12,400
Because Vermont uses federal AGI as the base for state tax, this directly increases both federal and Vermont taxable income.
Federal Income Tax Brackets Increase
- 12% → 15%
- 22% → 28%
- 24% → 31%
- dual-income households
- teachers, nurses, and public employees
- trades and service workers
- tourism and hospitality workers
- households earning $50K–$250K
Higher brackets increase total federal tax and raise Vermont taxable income as well.
QBI Deduction Made Permanent Under OBBBA
OBBBA permanently preserved the 20% Qualified Business Income (QBI) deduction, which benefits:
- LLC owners
- S-Corps
- sole proprietors
- contractors and freelancers
- certain rental operations
Beginning in 2026, new QBI rules include:
- updated income thresholds
- SSTB phaseout changes
- increased documentation requirements
Vermont does not provide a state-level QBI deduction.
Child Tax Credit Shrinks
- The federal Child Tax Credit decreases from about $2,000
- To roughly $1,000 per child
- Refundability decreases
This affects families throughout Burlington, Rutland, Montpelier, and suburban regions.
Marriage Penalty Returns
TCJA’s marriage penalty relief expires in 2026.
- reach higher federal brackets faster
- lose access to certain credits sooner
- face increased federal AGI, raising Vermont state tax bills
Vermont’s high percentage of dual-income professional households amplifies this impact.
Vermont–Specific Tax Considerations
1. Vermont Uses Federal AGI as the Starting Point for State Tax
- reduced federal deductions
- higher federal brackets
- lower federal credits
…all increase Vermont taxable income.
Residents in higher-cost areas like Chittenden County feel this the most.
2. Real Estate Owners & Rental Investors Will Be Affected
Vermont real estate markets — including Burlington, Montpelier, Stowe, Killington, and Brattleboro — will be impacted by:
- capital gains changes
- depreciation reductions
- rental loss rules
- STR participation and IRS documentation
- property sale timing
With property values rising, federal capital gains exposure becomes more significant.
3. STR Owners Must Prepare for Updated Federal Rules
- Stowe
- Killington
- Mount Snow region
- Burlington
- Lake Champlain region
- reduced bonus depreciation
- stricter material participation rules
- updated safe harbor standards
- stronger IRS recordkeeping expectations
STR hosts must prepare well in advance.
4. Vermont's High Cost of Living Magnifies Federal Changes
- high housing costs
- high childcare expenses
- high insurance premiums
- high utility and heating costs
The reduction in deductions and increase in brackets significantly affect cash flow for many families.
5. Retirement Income Remains Taxable in Vermont
- IRA withdrawals
- 401(k) distributions
- pension income
- some investment income
Federal bracket increases in 2026 raise the tax cost of retirement withdrawals, which then influence Vermont state taxes as well.
Who Is Most Affected in Vermont (2026)
- Dual-income families
- Healthcare, education, and trades workers
- Contractors and small business owners
- Real estate investors and landlords
- STR hosts
- Families with multiple children
- Retirees with taxable income
- Middle- and upper-middle-income earners
What Vermont Residents Should Do Before December 31, 2025
- Review federal and state withholding
- Maximize contributions to retirement accounts
- Consider Roth conversions
- Review QBI eligibility for small businesses
- Document STR participation and rental activity
- Evaluate capital gains exposure
- Plan timing for business or property sales
- Build a combined federal + Vermont tax strategy
Vermont 2026 Tax FAQ
Does Vermont conform to QBI?
No. QBI is federal-only.
Will Vermont taxes increase?
Rates remain the same, but taxable income rises due to federal changes.
Are families affected?
Yes. Reduced federal credits and deduction changes impact refunds.
Are STR owners affected?
Yes. Depreciation and participation rules tighten in 2026.
Are retirees affected?
Yes. Higher federal brackets raise the tax cost of withdrawals.
Get your 2026 Vermont Tax Strategy
Vermont residents face substantial federal tax changes in 2026.
Higher taxable income, updated business rules, reduced credits, and stricter rental property requirements make early planning essential.