Tax Year 2026Updated July 13, 2026

Does Vermont Tax Tips in 2026?

Unknown - Vermont has not confirmed whether it conforms to the federal tips deduction. As of August 2026, the Vermont Department of Taxes has not issued guidance on whether the OBBBA tips deduction (IRC §224) reduces Vermont taxable income. Vermont conforms to federal tax law in many respects but has not specifically confirmed adoption of this provision. Vermont's graduated rates range from 3.35% to 8.75%, with the rate jumping to 6.6% at $45,400 in taxable income – a threshold that some higher-income tipped workers exceed.

How Vermont's Tips Tax Treatment Works

Vermont computes state taxable income starting from federal adjusted gross income (AGI) with Vermont-specific modifications. The state conforms to the federal standard deduction ($15,700 for single filers in 2026) and generally follows federal tax law for many purposes. However, Vermont has not specifically confirmed whether the OBBBA tips deduction (IRC §224) is adopted.

If Vermont does conform, the federal tips deduction would reduce federal AGI, and that lower AGI would flow through as Vermont's starting point – automatically reducing state taxable income and potentially keeping more income in the lower 3.35% bracket. If Vermont does not conform, the state would need to add the tips deduction back, keeping tips fully taxable.

The bracket structure makes conformity particularly valuable for workers near the $45,400 threshold (about $61,100 in gross income after the standard deduction). Below this threshold, tips are taxed at 3.35%. Above it, the rate nearly doubles to 6.6%. A tips deduction that pulls taxable income below the threshold saves at the higher rate – creating a larger benefit than the flat-rate calculation would suggest.

Federal Tips Deduction Quick Reference

Detail	Value
IRC Section	§224 (OBBBA)
Maximum deduction	$25,000 tips
Deduction type	Above-the-line (Schedule 1-A)
FICA still applies?	Yes (Social Security 6.2% + Medicare 1.45%)
MFS eligible?	No (MFJ or Single/HoH only)
Effective dates	Jan 1, 2025 – Dec 31, 2028
Vermont treatment	Does not conform

Worked Examples Comparing Federal and Vermont Treatment

Example 1: Ski resort server (single filer, $34,000 income, $11,000 in tips)

Federal return:
Qualified tip income: $11,000
Tips deduction claimed: $11,000 (capped at $25,000)
Estimated federal tax savings: $1,320.00

Vermont return:
Vermont has not confirmed OBBBA conformity. If VT does NOT conform, the full $11,000 in tip income remains subject to Vermont income tax at 3.35% (VT taxable income of $18,300 falls entirely in the first bracket). Estimated VT tax on tips: $369. If VT DOES conform, this worker saves approximately $369 in state tax.

Example 2: Fine dining server in Burlington (single filer, $65,000 income, $25,000 in tips - federal cap reached)

Federal return:
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00

Vermont return:
Vermont has not confirmed conformity with the federal tips deduction. Without the deduction, VT taxable income of $49,300 crosses into the 6.6% bracket, with $3,900 taxed at 6.6%. If VT does NOT conform, the state tax attributable to the $25,000 in tips is approximately $964 (a mix of the 3.35% and 6.6% rates). If VT DOES conform, taxable income drops to $24,300, entirely in the 3.35% bracket, saving approximately $964.

Vermont's Tourism Economy and the Tips Question

Tourism is one of Vermont's largest industries, and the state's tipped workforce is concentrated in several distinct sectors:

Ski resorts: Vermont is home to some of New England's most popular ski destinations – Stowe, Killington, Sugarbush, Jay Peak, and others. These resorts employ hundreds of tipped workers in lodges, restaurants, and bars during the winter season.
Fall foliage tourism: September and October bring millions of visitors to view Vermont's famous fall colors, generating tip income for hospitality workers in inns, bed-and-breakfasts, and restaurants statewide.
Farm-to-table dining: Burlington, Stowe, Woodstock, and other Vermont towns have thriving restaurant scenes built on the state's agricultural identity. Fine dining servers in these establishments can earn substantial tip income.
Summer lake communities: Lake Champlain and other recreational areas support a seasonal hospitality workforce.

Vermont's Rate Structure Creates a Meaningful Jump

Vermont's four-bracket system has a significant jump from 3.35% to 6.6% at $45,400 in taxable income. This near-doubling of the rate means that higher-income tipped workers – particularly fine dining servers and bartenders in Burlington or resort areas – face a meaningfully higher state tax rate on their tip income. The tips deduction, if recognized, could keep some workers below this threshold.

Vermont Conforms on Standard Deduction but Question Remains

Vermont conforms to the federal standard deduction, which suggests a general disposition toward federal conformity. However, this does not guarantee conformity with every new federal provision. The OBBBA tips deduction is a new above-the-line deduction, and Vermont may need to explicitly adopt it. Workers should monitor tax.vermont.gov for guidance.

Related Tools

No Tax on Tips Calculator - calculate your federal tips deduction
Vermont Tax Guide - full state tax overview
Vermont Paycheck Calculator
Does Vermont Tax Overtime?
W-2 Code TP: Tips Reporting Guide
W-2 Code TT: Overtime Reporting Guide
All 51 States: Tips & Overtime Tax Map

Frequently Asked Questions

Does Vermont conform to the federal OBBBA tips deduction?

As of August 2026, Vermont has not issued official guidance on whether it conforms to the federal OBBBA tips deduction (IRC §224). Vermont conforms to federal tax law in many respects but has not specifically confirmed adoption of the OBBBA tips provision. The Vermont Department of Taxes has not published guidance on this question.

How does Vermont calculate taxable income relative to federal?

Vermont starts from federal adjusted gross income (AGI) and applies Vermont-specific modifications. The state conforms to the federal standard deduction ($15,700 for single filers in 2026). Whether the OBBBA tips deduction reduces VT taxable income depends on whether the lower federal AGI flows through or whether Vermont adds the deduction back.

What Vermont income tax rates apply to tip income?

Vermont uses four graduated brackets: 3.35% on the first $45,400, 6.6% on $45,400–$110,450, 7.6% on $110,450–$229,550, and 8.75% above $229,550 (single filers). The jump from 3.35% to 6.6% at $45,400 is significant. Higher-income tipped workers may have some tip income taxed at 6.6%, making conformity more valuable for them.

How does Vermont's tourism and hospitality sector relate to the tips question?

Vermont's economy depends significantly on tourism. Ski resorts (Stowe, Killington, Sugarbush), fall foliage tourism, summer lake communities, and the farm-to-table dining scene in Burlington and other towns employ thousands of tipped workers. These seasonal and year-round hospitality workers are directly affected by the conformity question.

Is Vermont's conformity position different for tips versus overtime?

The Vermont Department of Taxes has not issued separate guidance for tips versus overtime OBBBA provisions. Both remain unknown. However, the same conformity mechanism would likely apply to both provisions since they are both above-the-line deductions that reduce federal AGI.

Do I still get the federal tips deduction if I live in Vermont?

Yes. The federal tips deduction under IRC §224 applies on your federal Form 1040 regardless of where you live. Vermont residents can deduct up to $25,000 in qualified tip income from their federal AGI. The open question is whether this deduction also reduces your Vermont state taxable income.