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Fiscal office: HR1 leaves some federal deductions below Vermont’s taxable line but boosts child care credit refundable amount
Summary
State fiscal staff explained that many new federal deductions in HR1 appear below federal AGI and therefore generally do not reduce Vermont taxable income, while the federal child and dependent care credit’s expansion may increase Vermont tax expenditures because Vermont couples to that federal credit.
At a joint Ways & Means and Senate Finance briefing, Patrick Thirkin of the fiscal office walked committee members through how several HR1 changes to individual tax rules interact with Vermont’s tax base.
Thirkin used federal Form 1040 and Schedule 1 to illustrate the concept of “above the line” (federal adjusted gross income) and “below the line” amounts. He said Vermont starts with federal AGI (line 11a on the Form 1040) and that many new HR1 deductions—tips, overtime pay, auto loan interest and the enhanced senior deduction—appear on Schedule 1 (below AGI) and therefore “do not flow through” to reduce Vermont taxable income unless state statute specifically couples to those items.
Two HR1 items Thirkin flagged as notable for Vermont are the child and dependent care credit and the earned income tax credit (EITC). He said Vermont has a statutory coupling for the state child and dependent care credit equal to 72% of the federal amount. Because HR1 increased the reimbursement percentage for dependent care expenses (Thirkin illustrated a move from 35% to 50% in the federal schedule), that change raises Vermont’s refundable state credit. “All this means is that if you pay $1,000 for child care, you just have $500 back to the refundable credit in the state of Vermont,” he said.
Thirkin provided a fiscal estimate that the child care credit change is expected to add about $1,000,000 to Vermont’s tax expenditures starting in fiscal year 2027, on top of existing expenditures projected for fiscal year 2026.
On other items, Thirkin described the auto loan interest deduction as limited to qualified passenger vehicles with final assembly in the U.S. and subject to income thresholds (example thresholds presented in the briefing). He stressed that these deductions are often temporary (noting many provisions expire in 2028) and that the state will re‑examine flow‑through and scoring assumptions when the next consensus revenue forecast is available.
The fiscal office posted a longer memo and summary table with the calculations underlying the figures presented to legislators and asked committees to treat the current estimates as preliminary and subject to revision.
