Vermont's tax treatment of SSDI differs from federal rules
Vermont does not tax Social Security Disability Insurance (SSDI) income at the state level. This means you will not owe Vermont state income tax on your SSDI payments, even if you have other income that requires you to file a state return.
However, you may still owe federal income tax on part of your SSDI depending on your total income. Vermont's exemption applies only to state taxes. The federal government uses a formula based on your "combined income" — which includes SSDI, wages, interest, and certain other sources — to determine whether any of your SSDI becomes taxable at the federal level.
If you live in Vermont and receive SSDI, you need to understand both the state rule (no tax) and the federal rule (possibly taxable) to know what you actually owe.
Key Takeaways
- Vermont does not tax SSDI income at the state level, so you owe no Vermont state income tax on your disability payments.
- The federal government may tax part of your SSDI if your combined income exceeds certain thresholds, regardless of Vermont's state rule.
- Combined income includes SSDI, wages, self-employment income, interest, dividends, and certain other sources — not just earned wages.
- You may be required to file a federal tax return even if you owe no Vermont state tax, depending on your total income.
- The IRS publishes a worksheet each year to help you calculate whether your SSDI is taxable at the federal level.
How Vermont's SSDI exemption works
Vermont treats SSDI the same way it treats regular Social Security retirement benefits: neither is subject to Vermont income tax. This is a state-level decision, separate from federal tax law. Vermont's tax code specifically excludes Social Security and SSDI payments from taxable income for state purposes.
This exemption is automatic. You do not need to claim it on your Vermont return or file any special form. If you file a Vermont state income tax return, you straightforward do not report your SSDI as income. The same rule applies whether you receive SSDI as a disabled worker, as a child of a disabled or deceased worker, or as a surviving spouse.
Because Vermont has no state income tax on SSDI, your state tax burden depends entirely on other income you may have — wages, self-employment income, interest, or pensions. If SSDI is your only income, you will owe no Vermont state tax.
Federal taxation of SSDI in Vermont
Even though Vermont does not tax SSDI, the federal government may. The IRS uses a formula to determine whether part of your SSDI becomes taxable. This formula applies to everyone who receives SSDI, regardless of which state they live in.
The formula starts with your "combined income," which is the sum of your adjusted gross income (AGI) plus nontaxable interest plus half of your SSDI. The IRS then compares this number to two thresholds. If your combined income exceeds the first threshold ($25,000 for a single filer, $32,000 for married filing jointly), up to 50 percent of your SSDI may become taxable. If it exceeds the second threshold ($34,000 for single, $44,000 for married filing jointly), up to 85 percent may become taxable.
These thresholds have not changed since 1984 and do not adjust for inflation. This means more people become subject to SSDI taxation each year as wages and other income rise.
What counts as income for the federal SSDI tax calculation
The federal formula counts more than just wages. Your combined income includes wages, self-employment income, interest (both taxable and nontaxable), dividends, capital gains, rental income, pension income, and certain other sources. It does not include gifts, loans, or Supplemental Security Income (SSI).
If you are married and file jointly, both spouses' income counts toward the threshold, even if only one spouse receives SSDI. If you are married and file separately, a different (and usually less favorable) rule applies: any income earned by the non-SSDI spouse counts toward your threshold, which often results in more of your SSDI becoming taxable.
Part-time work, even a small amount, can push you over a threshold. A single person with $500 in wages and $25,000 in SSDI already has combined income of $25,250, which exceeds the first threshold by $250.
Whether you must file a federal return
You may be required to file a federal income tax return even if you owe no Vermont state tax. The IRS has separate filing requirements based on your gross income, age, and filing status.
For 2024, a single person under 65 must file if their gross income is $14,600 or more. A single person 65 or older must file if their gross income is $18,150 or more. These thresholds include wages, self-employment income, interest, dividends, and other sources — but not SSDI itself.
If your only income is SSDI, you do not have to file a federal return. However, if you have wages or other income in addition to SSDI, you may need to file even if your total is below the threshold, because the IRS wants to see whether any of your SSDI is taxable. The IRS publishes a worksheet in Publication 915 each year to help you determine whether you must file.
How to calculate federal tax on SSDI
The IRS provides a worksheet in Publication 915 (Social Security Benefits) that walks you through the calculation step by step. You can read this publication free from irs.gov or request it by phone at 1-800-829-3676.
The worksheet asks you to list your income sources, calculate your combined income, compare it to the thresholds, and then determine how much of your SSDI is taxable. The calculation is mechanical but requires careful attention to which income sources count and which do not.
If you have a tax preparer or use tax software, they should perform this calculation for you. If you prepare your own return, work through the worksheet line by line. Many people find it helpful to gather all income documents (W-2s, 1099s, bank statements showing interest) before starting.
What to do if you owe federal tax on SSDI
If the calculation shows that part of your SSDI is taxable, you have two options: pay the tax when you file your return, or request that the Social Security Administration withhold taxes from your SSDI payments.
Withholding is done using Form W-4V (Voluntary Withholding Request). You can submit this form to Social Security online through your my Social Security account, by mail, or in person at a local Social Security office. You can choose to have 7, 10, 15, or 25 percent of your SSDI withheld. This withholding is sent to the IRS and credited toward your federal tax liability.
Many people choose withholding to avoid a large tax bill at filing time. Others prefer to pay when they file. There is no penalty for either approach as long as you pay the full amount owed by April 15 (or the next business day if April 15 falls on a weekend).
Frequently Asked Questions
Do I have to file a Vermont state return if I only receive SSDI?
No. If SSDI is your only income, you have no Vermont state income tax liability and do not need to file a Vermont return. However, you may still need to file a federal return depending on your total income and age.
Can I claim SSDI as a deduction on my Vermont return?
No. Vermont does not tax SSDI, so there is nothing to deduct. You straightforward do not report it as income on your Vermont return.
If I work part-time and receive SSDI, do I owe Vermont tax on my wages?
Yes. Vermont taxes wages and self-employment income normally. SSDI is exempt, but your wages are not. You may owe Vermont state tax on your wages even though you owe no tax on your SSDI.
What if I moved to Vermont from another state that taxes SSDI?
Once you are a Vermont resident, Vermont's exemption applies to your SSDI going forward. You may owe tax to your former state on SSDI received while you lived there, depending on that state's rules. Contact that state's tax department for guidance on your final return.
Does Vermont's SSDI exemption affect my SSI (Supplemental Security Income)?
No. SSI is a separate program with different rules. Vermont does not tax SSI either, but SSI has its own income and resource limits that are not affected by state tax law.