Updated October 4, 2026. Quick answer: Partly, by income. Schedule IN-112 says “all military retirement and survivor benefit income is exempt” for a filer with adjusted gross income of $125,000 or less, phased down above that and not available at $175,000 or more.
How Vermont treats military retired pay
| Item | What the documents say |
|---|---|
| Treatment | Military retirement and survivor benefit income from federal Form 1040 line 5b, claimed on Schedule IN-112, Part I, line 13 |
| AGI of $125,000 or less | Fully exempt, for any filing status |
| Over $125,000 and under $175,000 | Partly exempt; the worksheet divides by $50,000 |
| $175,000 or more | No exemption for a filer of any filing status |
| Rates | Not printed in the document read |
A $30,000 example
A retiree with $30,000 of military retired pay and adjusted gross income of $125,000 or less exempts all $30,000. Above $125,000 the Military Retirement Income Exemption Worksheet sets the partial figure.
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What changes in 2026
Act 71, signed June 25, 2025, created this exemption beginning with the 2025 tax year, and eligible filers may claim it when filing in 2026. No further 2026 change is printed in the document read.
Federal rules
The state’s treatment sits on top of the federal one. The IRS explains the federal side in Publication 3, Armed Forces’ Tax Guide.
Related: whether Vermont taxes pensions, how Vermont taxes retirement income, military retirement pay by state, and the military retirement calculator.
Sources
- 2025 Schedule IN-112 Instructions: https://tax.vermont.gov/sites/tax/files/documents/IN-112-Instr-2025.pdf
Sources: the primary documents linked above, read on October 4, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.