The proposed bill to end income tax on Social Security benefits in Vermont is gaining attention. Introduced last week, the bill aims to make retirement easier by exempting Social Security benefits from state income tax. Vermont is currently one of only nine states that tax these benefits.
The bill outlines an eight-year plan to gradually phase out the tax, starting next year and ending by 2034. Under the current plan, the tax exemption is only available for individuals under $50,000 and couples under $65,000. Bill drafters believe this change will provide much-needed relief for retirees in Vermont.
Many older Americans are surprised to learn that they may owe the IRS because the government does not automatically deduct taxes from their Social Security benefits. This financial strain comes at a time when the Old Age and Survivors Insurance Trust Fund, responsible for retirement benefits, is projected to run out of funds by 2033. According to a recent trustees’ report, the Social Security system would only be able to pay out 79% of retirement benefits if the trust fund is depleted.
This highlights the importance of finding ways to bolster the trust fund balance while providing tax breaks for Social Security recipients.
Vermont’s phased tax relief plan
Critics of the bill argue that it could create a “doughnut hole” in income exempt from Social Security payroll taxes.
High-income workers would pay payroll taxes on the first $176,100 of their income, not from $176,101 to $249,999, and then again on income beyond $250,000. While this might benefit older Americans by removing federal income tax on benefits, it raises concerns about increased payroll taxes on high earners. The future of the proposed bill remains uncertain, as it must navigate the legislative process in Vermont.
However, public sentiment may be shifting in favor of such changes. A 2024 study by the Program for Public Consultation at the University of Maryland found that 87% of American citizens, including 86% of Republicans, support requiring payroll taxes on all income over $400,000. As the debate continues, many Vermonters hope the bill will pass, providing much-needed relief for retirees in the state.
The gradual phase-out of the tax over eight years is seen as a balanced approach, allowing individuals and couples to adjust to the changes over time. The proposed bill is just one example of the ongoing efforts to address the challenges facing the Social Security system in the United States. As the population ages and the trust fund faces potential depletion, lawmakers at both the state and federal levels are seeking ways to ensure the long-term sustainability of the program while providing support for retirees.