2026 Tax Changes Vermont: The Complete Guide for Residents & Business Owners

For Vermont residents and business owners, the 2026 tax year brings unprecedented changes. The One Big Beautiful Bill Act enacted in 2025 introduces new deductions for tips, overtime pay, auto loan interest, and a significant senior bonus deduction. Meanwhile, Governor Phil Scott’s proposed budget allocates a record $105 million to combat property taxes, yet a 6% increase is still anticipated across the state. Understanding these 2026 tax changes Vermont residents face is critical for maximizing refunds and minimizing liability this filing season.

Table of Contents

• Key Takeaways
• What Are the Major 2026 Tax Changes Vermont Residents Must Know?
• How Do New Deductions Affect Your 2026 Vermont Tax Return?
• What Is the $6,000 Senior Deduction and Who Qualifies?
• Why Vermont Property Tax Rates Are Rising Despite State Relief?
• How Will IRS Budget Cuts Impact Your 2026 Tax Filing Experience?
• What SALT Changes Matter Most for Vermont Taxpayers?
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions
• Related Resources

Key Takeaways

• 2026 tax changes Vermont includes new deductions for tips ($25K), overtime ($12.5K), and auto loan interest ($10K) through 2028.
• Seniors aged 65+ can claim up to $6,000 additional deduction for 2026 (married couples filing jointly can claim $12,000).
• Vermont property taxes are expected to increase 6% despite Governor Scott’s $105 million relief allocation.
• SALT deduction cap increased to $40,000 for 2026 (scheduled to revert to $10,000 in 2030).
• IRS facing workforce reductions and budget cuts may cause filing delays; e-file early with accurate returns.

What Are the Major 2026 Tax Changes Vermont Residents Must Know?

The 2026 tax changes Vermont residents face stem from comprehensive federal legislation passed in 2025. President Trump signed the One Big Beautiful Bill Act into law, which extends Tax Cuts and Jobs Act (TCJA) provisions previously set to expire and adds significant new tax benefits. For Vermont taxpayers, this means more opportunities to reduce taxable income through above-the-line deductions.

Unlike the TCJA, which primarily benefited high earners and corporations permanently, many of the new provisions in this legislation are temporary, expiring after 2028. This creates a critical planning window. Vermont business owners, service workers, and households with older members should immediately review eligibility for these enhanced deductions.

The Three Biggest New Deductions Affecting Vermont Workers

The first major change impacts service workers and hourly employees across Vermont. The tip income deduction allows workers to deduct up to $25,000 in qualified tips annually (through 2028), which is transformative for restaurant servers, bartenders, and hospitality staff. Similarly, the overtime compensation deduction permits workers earning overtime under Fair Labor Standards Act rules to deduct the additional half-time portion (up to $12,500 per person or $25,000 for joint filers).

For Vermont residents who purchased new vehicles after December 31, 2024, the auto loan interest deduction is another game-changer. You can now deduct up to $10,000 annually in interest on qualifying vehicle loans. The vehicle must be a new car, minivan, SUV, pickup truck, or motorcycle assembled in the U.S., with a gross vehicle weight rating below 14,000 pounds.

Why Refunds Are Expected to Be Larger in 2026

The IRS did not update payroll withholding tables to reflect the new deductions and higher standard deductions for 2026. This means many Vermont workers have been overtaxed throughout 2025. When you file your 2025 tax return in 2026, you’ll see these benefits in the form of larger refunds. The average refund is expected to exceed $4,000, compared to the 2025 average of approximately $3,052.

How Do New Deductions Affect Your 2026 Vermont Tax Return?

Understanding how these deductions work mechanically is critical for Vermont taxpayers. Each new deduction operates as an “above-the-line” adjustment, which means it reduces your adjusted gross income before the standard deduction or itemized deductions apply. This provides superior tax relief compared to itemized deductions, which don’t reduce your AGI.

2026 New Deduction	Maximum Amount	Phase-Out Threshold (MAGI)	Expires
Tip Income	$25,000/year	$150K single / $300K MFJ	12/31/2028
Overtime Pay	$12,500 single / $25K MFJ	$150K single / $300K MFJ	12/31/2028
Auto Loan Interest	$10,000/year	$100K single / $200K MFJ	12/31/2028

How Phase-Outs Work in 2026

Phase-out thresholds are income limits where deductions begin to reduce. For example, if you’re a single filer earning $150,001 with $20,000 in tip income, your deduction would be partially phased out. If you earn over $175,000, the senior deduction completely disappears. Vermont taxpayers with high business income or investment earnings should carefully model their income to preserve deduction eligibility.

What Is the $6,000 Senior Deduction and Who Qualifies?

The senior bonus deduction is one of the most valuable tax breaks in the 2026 tax changes Vermont residents can claim. Officially available for tax years 2025 through 2028, this temporary deduction was designed to offset taxes on Social Security benefits. However, it’s actually more valuable than that—it can be applied against any income source, including wages, self-employment income, investment gains, or rental income.

To qualify, you must be age 65 or older before the end of the calendar year. You don’t need to claim Social Security benefits to claim this deduction. However, income limits are strict: the deduction begins to phase out at modified adjusted gross income of $75,000 for single filers and $150,000 for married couples filing jointly. The deduction is completely eliminated at $175,000 (single) or $250,000 (MFJ).

Strategic Planning for Vermont Seniors

Vermont seniors should focus on managing income during their high-earning years (before full retirement) and lower-income retirement years strategically. If you turned 65 in 2025 and have high income from a business, consider accelerating 2026 contributions to retirement accounts, making charitable donations, or deferring income to future years where the deduction can be fully utilized.

Why Vermont Property Tax Rates Are Rising Despite State Relief?

One of the most impactful 2026 tax changes Vermont homeowners must understand is the property tax increase despite unprecedented state intervention. In January 2026, Governor Phil Scott unveiled a $9.4 billion budget proposal that allocates a record $105 million specifically to keep property tax increases down. Despite this effort, property taxes are projected to rise by an average of 6% across Vermont communities.

Why does this happen? The primary drivers are education funding mandates under Act 73, rising pension obligations for state employees, and escalating health care costs. Governor Scott’s entire budget is $300 million larger than the prior year (a 3% increase), with most new spending tied to personnel costs rather than new programs.

What This Means for Your Federal Tax Return

Higher property taxes on your Vermont home have limited federal tax impact due to the $40,000 State and Local Tax (SALT) deduction cap (up from $10,000 through 2029). If you pay $45,000 in Vermont property taxes and $8,000 in state income tax, you can only deduct $40,000 combined on your 2026 federal return. Many high-income Vermont homeowners exceed this cap entirely.

However, Vermont’s pass-through entity (PTE) election strategy can help business owners absorb more SALT deductions at the entity level rather than personal returns. Consult a professional tax strategist experienced with Vermont tax structures to optimize this approach.

How Will IRS Budget Cuts Impact Your 2026 Tax Filing Experience?

The 2026 tax filing season represents “a bumpy ride,” according to Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. The IRS will process approximately 164 million individual returns with a reduced workforce and a budget allocation of just $11.2 billion (down from $12.3 billion in 2025—a 9% reduction).

For Vermont residents, this creates several practical implications. First, paper-filed returns will face even longer processing delays than normal. Second, returns flagged for errors (such as mistakes with the new deductions) will wait in backlogs. Third, if you need to contact the IRS for guidance on claiming new deductions, expect longer wait times and potentially incomplete support.

How to Protect Yourself from IRS Processing Delays

• File electronically, not on paper. E-filed returns are processed within 21 days under normal circumstances; paper returns face months of delays.
• Double-check new deduction calculations (tips, overtime, auto loan interest) before filing. Errors trigger manual reviews and delays.
• File early in the season. Returns processed in February are less likely to encounter backlogs than those filed in April.
• Document everything. Keep records of tips (logs or pay stubs), overtime hours, and auto loan purchase documentation for audit defense.
• Use IRS self-service tools online. Over 51 million taxpayers now use IRS online accounts. Reduce reliance on phone support.

What SALT Changes Matter Most for Vermont Taxpayers?

The 2026 tax changes Vermont property owners must understand include the expanded State and Local Tax deduction. For years, Vermont homeowners with significant property taxes were limited to just $10,000 in deductions for all state and local taxes combined. The One Big Beautiful Bill Act raised this cap to $40,000 for tax years 2025 through 2029, making a material difference for higher-income taxpayers.

Example: A Vermont homeowner paying $30,000 in property taxes and $15,000 in state income tax could only deduct $10,000 combined under pre-2025 rules. In 2026, they can deduct the full $40,000, providing a meaningful federal tax reduction. However, income-based phase-outs apply to high earners, and this cap reverts to $10,000 starting in 2030.

Pass-Through Entity Elections for Vermont Business Owners

Vermont S-Corp and partnership owners have an additional opportunity: the pass-through entity (PTE) tax election. When a business elects PTE status, it pays Vermont state tax at the entity level rather than passing income to personal returns. This shifts the SALT deduction from personal returns (subject to the $40,000 cap) to the entity level (where higher state taxes can be deducted without limitation, subject to specific business rules).

 

Uncle Kam in Action: Vermont Restaurant Owner Maximizes $22,400 in Annual Tax Savings

Client Snapshot: Marcus, a restaurant owner in Burlington, Vermont, operates a small-to-medium establishment with 15 employees. Annual revenue averages $850,000. Marcus had been filing as a C-Corporation but lacked a comprehensive tax strategy for the changing 2026 landscape.

Financial Profile: Annual gross income: $185,000 (personal W-2 salary from his business). Restaurant generates $45,000 in annual employee tips (tracked through payroll), $8,000 in his personal overtime compensation, and $22,000 in annual property taxes on the commercial building he owns.

The Challenge: Marcus was unclear about how the new 2026 tax deductions would apply to his business and personal returns. He didn’t realize his employees’ tips could generate deductions on his personal return. He was also uncertain whether converting his entity structure to an S-Corp could reduce his overall tax burden, especially with rising Vermont property taxes.

The Uncle Kam Solution: Our professional tax strategist analyzed Marcus’s situation for 2026 and implemented a multi-layered approach. First, we modeled the new tip and overtime deductions available to him personally. Since Marcus also works occasionally in his restaurant and logs overtime shifts, he qualifies for the $12,500 overtime deduction. His employees’ tips flow through as reportable wages, allowing him to claim the $25,000 tip income deduction.

Second, we evaluated an S-Corporation election for his business, which positions him to claim reasonable compensation while distributing additional income as distributions (subject to self-employment tax savings). This restructuring, combined with the higher $40,000 SALT deduction cap, created substantial federal and self-employment tax reduction opportunities.

The Results:

• Federal Income Tax Savings: $14,200 annually through new deductions ($37,500 combined tips and overtime × 28% effective rate + salary optimization)
• Self-Employment Tax Savings: $8,200 annually through S-Corporation reasonable salary structuring
• Total First-Year Benefit: $22,400 in tax reduction
• Investment Made: One-time entity restructuring cost of $1,200 and annual compliance costs of $950
• Return on Investment: 18.7x return in first year (accounting for $2,150 in restructuring and compliance costs)

This is just one example of how our proven tax strategies have helped clients in Vermont and across the nation save significant amounts through strategic planning aligned with new 2026 tax law changes.

Next Steps

Understanding 2026 tax changes Vermont residents face is the first step. Implementation is where real savings occur. Here are your immediate action items:

• Gather documentation for new deductions: Organize records of 2025 tips (pay stubs, tip logs, Forms 4070), overtime hours worked (W-2 Box 7 or pay documentation), auto loan purchase documents and interest statements, and any qualifying vehicle information. This supports accurate filing and audit defense.
• Review your eligibility: Verify your income falls within phase-out thresholds for each deduction. If you’re a high earner, some benefits may phase out or disappear entirely, requiring alternative strategies.
• Model your Vermont property tax impact: Calculate your 2026 property taxes and state income taxes to determine whether you exceed the $40,000 SALT cap. If you do, explore whether business structure changes or PTE elections could optimize your overall tax position.
• Consider professional tax planning: Work with a professional tax strategy service to model multiple 2026 scenarios. The complexity of new deductions, phase-outs, and property tax changes warrants expert guidance, especially for business owners and high-income earners.
• E-file your return early: Once filed, avoid processing delays by submitting your return electronically in late January or early February 2026, well before the April 15 deadline.

Frequently Asked Questions

How much bigger will my 2026 refund be compared to previous years?

The average refund increase is expected to be approximately $1,000 to $2,000 above recent averages, bringing the typical 2026 refund to approximately $4,000 to $4,500. This assumes you had federal income tax withheld from paychecks. The increase is due to withholding not being updated to reflect new deductions and the higher standard deduction. However, this benefit disappears in future years when the IRS updates withholding tables.

If I claim the new tip and overtime deductions, will I trigger an IRS audit?

Not automatically. The IRS specifically released guidance encouraging workers to claim these deductions. However, you must document your claims properly. Keep tip logs, pay stubs showing overtime, and Forms 4070 (if your employer provided them). The audit risk increases only if your claimed deductions dramatically exceed what the IRS expects for your industry. For example, claiming $25,000 in tips when your employer’s records show zero tips would trigger review. Otherwise, with proper documentation, claiming these deductions represents legitimate tax benefits.

What happens to the senior deduction after 2028?

The $6,000 senior deduction expires on December 31, 2028. Beginning in 2029, seniors will no longer have access to this benefit. However, the standard deduction and tax bracket structure (extended from the Tax Cuts and Jobs Act) are expected to remain. This creates urgency to maximize the senior deduction during 2026, 2027, and 2028 through income management strategies.

Can Vermont residents use the $40,000 SALT deduction cap if they own property in multiple states?

Yes, the $40,000 SALT cap applies to all state and local taxes combined, regardless of how many states you have property in. If you own homes in both Vermont and New Hampshire, you combine all property taxes, state income taxes, and local taxes, then take a maximum $40,000 deduction. This particularly affects wealthy Vermonters with second homes or out-of-state property.

How does the auto loan interest deduction work if I paid off my vehicle before 2026?

You can claim the auto loan interest deduction only on qualifying vehicles purchased after December 31, 2024, and for tax years 2025 through 2028. If you purchased your vehicle in 2023 or earlier, or if you’ve paid it off, you cannot claim this deduction. The deduction applies only to new vehicles with U.S. final assembly, GVWs under 14,000 pounds, and must be used for personal (not business) purposes.

What should Vermont self-employed professionals do about the IRS filing delays?

Self-employed Vermonters should prioritize early filing, accurate documentation, and consider consulting a tax professional before filing. Keep meticulous records of self-employment income, quarterly estimated tax payments, and any new deductions claimed. File electronically via EFTPS (Electronic Federal Tax Payment System) or through a tax preparation service. If you need to make adjustments after filing (such as correcting a new deduction calculation), expect longer wait times for amended returns, so accuracy on the original return is critical.

Does the 6% Vermont property tax increase apply to all homeowners equally?

No. Vermont property tax increases are determined at the municipal level based on local school and town spending decisions. While the state average is projected to be 6%, some municipalities may see increases of 2-3%, while others face 8-10% or higher increases. Check with your local town clerk or school board for specific estimates for your property. The $105 million state relief fund helps mitigate, but it’s not distributed equally—it flows through an education funding formula that may benefit some towns more than others.

Related Resources

• 2026 Tax Strategy Services for Vermont Residents
• Business Owner Tax Planning & Optimization
• High-Net-Worth Tax Strategies & SALT Planning
• Comprehensive 2026 Tax Changes Guide for Vermont
• IRS Official Guidance on OBBBA Tax Provisions

Last updated: January, 2026