Vermont Military Pay Income Exclusion

Title 32, section 5823(a)(2) subtracts two different things from a Vermont resident's income and they are worth separating, because most summaries run them together. The first is military pay for full-time active duty with the U.S. Armed Services earned outside the State. Read the three conditions: full-time, active duty, and earned outside Vermont. A Vermont resident stationed in Vermont pays Vermont tax on that pay. A Vermont resident stationed anywhere else does not, and there is no cap on the amount. The second is the first $2,000.00 of military pay for unit training in the State, paid to National Guard and U.S. Reserve personnel. Two conditions attach to it and both are easy to fail. The Adjutant and Inspector General or the Reserve Component Commander has to certify that the taxpayer completed all unit training of their unit during the calendar year, and the taxpayer's federal adjusted gross income has to be less than $50,000.00. A drilling Guard member with a civilian salary above $50,000 gets nothing here, and one who missed drills gets nothing regardless of income. Section 5823(a)(3) subtracts funds received through the federal Armed Forces Educational Loan Repayment Program under 10 U.S.C. chapters 109 and 1609, to the extent they were included in federal AGI. A loan repayment incentive that is federally taxable is not taxed by Vermont. The same exclusions reach a nonresident. Section 5823(b)(3) keeps full-time active duty pay, the loan repayment funds, and the first $2,000 of in-state unit training pay out of the Vermont income of a nonresident who performs services in the State, on the same conditions. A Guard member from New Hampshire drilling in Vermont is covered. Section 5830d handles combat zone service by importing 26 U.S.C. 7508 into the Vermont income tax chapter. It reaches individuals called up for full-time active military duty as a result of a military conflict in an area the President has designated a combat zone, regardless of whether the duty is performed within the combat zone, and individuals serving in an area federal law treats as if it were a combat zone. The federal deferral of filing and payment deadlines runs on the Vermont return as well, without a separate application. Two things this section does not do. It does not exempt military retirement pay, which has its own schedule in section 5830e. And it does not exempt a Vermont resident's in-state active duty pay above the drill pay figure.