For this year's election, Vermont Public has been using a reporting model known as Citizens Agenda.
Basically, that means we've been taking the lead from you by asking Vermonters what issues they care about ahead of Election Day next month.
Cathy Clark of Waterbury is among several people who want to know why Vermont is one of nine states that taxes some Social Security benefits.
The former Virginia resident moved to Waterbury four years ago to be near her daughter and grandson, but her old state didn't tax Social Security benefits.
Cathy Clark: For years, I have looked at Social Security as something that I deserved, that I pay taxes on, and now I see that taxation is happening for all or part of your income.
So, why and how does Vermont tax Social Security benefits?
Vermont Public’s Bob Kinzel has been looking into that question, and he recently spoke with host Jenn Jarecki to share more. This interview was produced for the ear. We highly recommend listening to the audio. We’ve also provided a transcript, which has been edited for length and clarity.
Jenn Jarecki: OK, Bob, tell us, what did you find out about how Social Security works here in Vermont?
Bob Kinzel: Jenn, the first thing I found out, this is a complicated issue. So let's look at this question: Does Vermont tax Social Security benefits? Now, the answer for some people is no. The answer for some people is yes. And then there's a big caveat tied to all of this that I'll explain later. So you can see why many people are confused about what the policy actually is.
Jenn Jarecki: It does seem to cover all the possibilities of no and yes, and maybe. So, can you break it down a little more for us?
Bob Kinzel: Let's start with the no answer. Under Vermont law, individuals with incomes below $50,000 a year do not pay state income taxes on their Social Security benefits, and couples with incomes below $65,000 a year are also exempt from having their benefits taxed. Tax Commissioner Craig Bolio says it might be time to consider raising these income levels.
Craig Bolio: With the cost of living going up so rapidly for so many folks, right, are these income thresholds really the correct ones for people who are living modestly, and having it be a place where seniors can retire with dignity? So, it's a robust policy debate, for sure. And I can definitely understand folks who look at this and then go, "Man, we're sort of in a unique spot, aren't we?" And I would say that when it comes specifically to the taxation of Social Security, that's true.
Bob Kinzel: Jenn, the tax department says there are about 80,000 people who claim Social Security benefits on their Vermont income tax returns, and roughly half of them fall under the exemption provision. So, that means about 50% of all Social Security recipients in Vermont do not pay state income taxes on their benefits, and the flip side is true as well. About 50% definitely do.
Jenn Jarecki: OK, Bob, so that takes care of the no category. But you just mentioned the other 50%. So who does get taxed on Social Security benefits?
Bob Kinzel: Jenn, these would be the people whose incomes are above the exemption limits that I just mentioned. And these limits are actually phased out, which makes the whole thing a little more confusing.
But the bottom line is this: Individuals with incomes above $60,000 a year, and couples with incomes above $75,000 a year, do pay Vermont income taxes on all of their Social Security benefits.
Greg Marchildon is the state director of AARP. He says this current approach is unfair because Social Security taxes were already imposed on a person's income when they were working.
Greg Marchildon: Being taxed twice is just simply unfair. And Social Security — the strength of the Social Security program — is the fact that it's a social insurance program and that everybody is in and everybody is treated — should be treated — the same way.
Bob Kinzel: Jenn, I think this is a really key point. Are these retirees being taxed twice? Once, when they were working, and now again, on their benefits.
Glenn Walberg is an associate professor at the Grossman School of Business at UVM. He says it's not a clear case of double taxation, because a person's employer also contributed on their behalf to the Social Security fund.
Glenn Walberg: What Congress recognizes, that for someone who's in retirement, on average, the total benefits they get from Social Security exceed the total amount that was ever paid in on behalf of that employee, from both the employee and the employer. So, you're essentially getting out more than you ever put in. So, I don't think you really have as much of a double taxation concern, as some people might suggest,
Bob Kinzel: Jenn, Vermont receives about $75 million a year from taxing Social Security benefits, and this money goes directly into the general fund, which is used to pay for state government programs. Now, Greg Marchildon at AARP says it's not realistic to completely eliminate this tax at one time, because it would leave a huge revenue gap. So, he wants lawmakers to gradually raise the income exemption levels.
Greg Marchildon: So, I think that what our retirees in the state want to see is a commitment from elected officials that they want to move, over some period of time, to make sure that we can eliminate this tax. But I don't think that — we're certainly not calling for that to be done in one fell swoop.
Bob Kinzel: But Jenn, Professor Walberg says this approach raises a key question: Is there an income level at some point where it is appropriate for Vermonters to pay state taxes on their benefits?
Glenn Walberg: They would feel relief if the Social Security benefits they also received are not taxed, but the same time, they also have an ability, likely, to pay tax. And if we think of just paying taxes as sort of a necessary evil, we may expect that if you've got the ability to pay tax, then maybe you should.
Bob Kinzel: So Jenn, this issue raises some important tax policy questions.
Jenn Jarecki: It really does Bob. OK, so we've covered the folks who don't pay taxes on their benefits and the people who do, but you mentioned a big caveat earlier, what exactly is that?
Bob Kinzel: Jenn, I am approaching this topic with great trepidation, but let's give it a try. It turns out that at the federal level, there's an exemption for the first 15% of Social Security benefits for everyone, regardless of their income. Now, because Vermont taxpayers use their federal adjusted gross income to determine their state tax responsibility, this flows right through to a person's Vermont tax return. So, this means that everybody in Vermont gets at least 15% of their Social Security benefits exempted from state income taxes through this process, and this includes all the people who have incomes above the state exemption levels.
Jenn Jarecki: OK Bob, is it true that the federal income exemption levels to tax Social Security benefits and the state levels are actually quite different?
Bob Kinzel: It's absolutely true, Jenn, and this is another major point of confusion. And that's because the federal income exemption levels are much lower than Vermont's. So, I've actually talked to some folks in Vermont who were unaware that there is a significant difference, and they thought, because they were paying federal income taxes on their Social Security benefits, they assumed they were paying estate taxes as well, but this was not the case.
You know, Jenn, this issue is really a work in progress, because depending on the state's financial picture this winter, some lawmakers during the 2025 session may want to consider raising Vermont's income exemption levels so that fewer people will have their benefits taxed by the state. And Jenn, again, thanks to Cathy Clark of Waterbury for suggesting this question.
Read what Vermont candidates are saying about Social Security taxation this year in Vermont Public's guide:
This story is part of Vermont Public’s Citizens Agenda approach to election coverage. We’re asking a simple question: What do you want the candidates to be discussing as they compete for your votes? Front Porch Forum is our lead outreach partner for this project.
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