Updated October 5, 2026. Quick answer: Yes, with a narrow exemption. Vermont lets a filer exempt “income you received from a contributory annuity, pension, endowment, or retirement system” of the U.S. or a state government, but only for benefits based on earnings not covered by Social Security, up to $10,000.
State retirement-income forms, line by line: Vermont Schedule IN-112.
How Vermont treats annuity income
| Item | What the documents say |
|---|---|
| Treatment | Taxed; a capped exemption for government retirement systems |
| 2025 rates | 3.35%, 6.60%, 7.60% and 8.75% by bracket |
| The cap | “enter your eligible retirement system income or $10,000, whichever is less.” |
| Phase-out | Full below $55,000 of adjusted gross income for a single filer ($70,000 joint), phased out to nothing at $65,000 ($80,000 joint) |
| The condition | “applies to benefits that are based on earnings not covered by” |
| Purchased annuities | The booklet and 32 V.S.A. 5830e cover only contributory systems of the U.S. or a state; they do not mention a commercial annuity |
A $24,000 example
A retiree with $24,000 from a government contributory annuity and adjusted gross income under $55,000 exempts $10,000, leaving $14,000, computed as $24,000 minus $10,000.
A commercial annuity paying $24,000 is not covered, so at the lowest 3.35% rate alone the tax is $804, computed as $24,000 x 3.35%; higher brackets apply as income rises.
What changes in 2026
The latest documents read print no 2026 change to the way annuity income is taxed.
Federal rules
The state’s treatment sits on top of the federal one. The IRS explains the federal side in Topic no. 410, Pensions and Annuities and Publication 575, Pension and Annuity Income.
Related: whether Vermont taxes pensions, how Vermont taxes retirement income, state tax on 401(k) and IRA withdrawals, how a surrendered annuity is taxed, and pension and annuity decisions.
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Answer againSources
- 2025 Vermont Income Tax Booklet (Vermont Department of Taxes): https://tax.vermont.gov/sites/tax/files/documents/Income-Booklet-2025.pdf
- 2025 Vermont Tax Rate Schedules (Vermont Department of Taxes): https://tax.vermont.gov/sites/tax/files/documents/TaxRateSched-2025.pdf
- 32 V.S.A. 5830e Retirement income; Social Security income (Vermont General Assembly): https://legislature.vermont.gov/statutes/section/32/151/05830e
Sources: the primary documents linked above, read on October 5, 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.