Welcome to the Tax Blog

News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
  • The Tax Preparation Business
  • Tax Planning

If you have a question or comment, please drop me a line. Paul @ PIM Tax.

23 September 2015

Surface Transportation and Veterans Health Care Choice Improvement Act of 2015

Virginia beach tax preparation new Tax LawThat's a mouthful, eh? That's the name of a law President Obama signed on 31 July 2015. Even if you heard about it, I am willing to bet you didn't know there are some changes to the tax law in there, did you? There were quite a few changes, actually, but since they don't impact every American it didn't get a lot of attention from the media. Strangely, tax law changes are not mentioned anywhere in the title of the new law!

Here's the short version of the changes:

Change of Due Date for Partnership Returns (Form 1065). Beginning in tax year 2016 Partnership Returns will need to be filed by the 15th day of the third month after the tax year. For nearly everyone that means March 15, 2017. If your partnership's tax year is different from the calendar year it's going to be different. Form1065 (Partnership Return) will still be due on April 15, 2016 for tax year 2015.

C Corp Returns Due Date. Just the opposite of the partnership return. The due date was previously March 15, but has been moved to April 15. For corporations that do not use the calendar year as their tax year the due date is the 15th day of the 4th month after the tax year concludes. This change also takes effect for the tax FILING season in 2017.

Additional Information on Mortgage Interest Statements. Also beginning in 2017, mortgage lenders will be required to include the address of the property securing the loan, the loan origination date, and the principal balance at the beginning of the calendar year on Form 1098 Mortgage Interest Statement. I am happy about this change. There has been some confusion in the past.

Consistent Basis Reporting Between Estates and Beneficiaries. Beneficiaries receive a stepped-up basis in inherited property (such as a house). This means if the house is valued at $300,000 on the date of death, the beneficiary's basis in the property (for sale purposes) will be $300,000. For a while there has been a conflict between the estate administrator trying to keep property valuations low in order to keep estate taxes low, and the beneficiary trying to keep the valuation high so that his basis is high. The new law requires the estate administrator to include the valuation of each individual property with the estate tax return - with copies to the beneficiaries.

Note: Due to the (currently) large estate tax exclusion ($5.43 million) estate returns are only required to be filed on the relatively small number of estates exceeding that value. There are, however, some reasons to file an estate return even if it isn't required. Consistent reporting of basis between estate and beneficiary is now another reason to consider filing an estate return even if the estate value is below the requirement threshold.

Foreign Bank Account Reporting (FBAR) Dates. If you have more than $10,000 total in overseas banks you have to report it on FinCen Form114. The due date was formerly June 30, but has been moved back to April 15. While that seems like it raises the burden on the taxpayer to get the Form 114 filed, the new law adds (for the first time) the possibility of getting a 6-month extension to file. Like the other laws, it takes effect in 2016 for the 2017 tax filing.

There were a few other tax items in this new law, but those are the main points. What any of the new tax provisions have to do with surface transportation or veteran's health care is beyond me. I strongly suspect I would not enjoy a front row seat to see how the legislative sausage gets made in Washington. I prefer things simpler - like putting new tax laws in a bill called The New Tax Laws for 2015 Act. Direct and to the point!

16 September 2015

Those of us who work in the tax field tend to throw words and terms around that most people don't use on a regular basis. One such term is 'Top Marginal Rate'. I thought I'd take a little time to explain what this term means, and why it is important.

Our federal tax code is progressive, meaning as income increases it gets taxed at a progressively higher rate. These different rates are known as the marginal rates (or tax brackets), and they change every few years as the Congress and the President come to an agreement on who should be paying what, and how much.There are different marginal rate schedules for each filing status. The current marginal rate schedules for Single, MFJ, and HoH are shown in the table below.

tax preparation virginia beach marginal rates3

As you can see, we currently have 7 different marginal rates ranging from 10% to 39.6%, and the different filing statuses pass through them at different levels of taxable income. Note this is TAXABLE income, not your gross income or your AGI. This is the income you are taxed on after all adjustments, deductions, and exemptions are taken into consideration. (Taxable income is found on Line 43 of form 1040)

The table is good, but I think a chart does a better job of demonstrating the comparison between marginal tax rates.

tax preparation virginia beach marginal rates

At the lower income levels (where the vast majority of us live) the comparison is fairly dramatic. A single person zips through the lower marginal rates and has income exposed to the 25% and 28% rates much earlier than the MFJ and HoH filers. A single filer with $100,000 of taxable income will pay significantly more income tax than an MFJ filer with $100,000 of taxable income.

Your top marginal rate is the highest marginal rate at which your income is taxed. It is an important number to know because any tax savings you can generate are saved at your top marginal rate. Once again, I think a graphic will be useful. Let's take a look at a single filer and give her a fairly high taxable income of $300,000 to make it interesting.

military discount tax prep virginia beach

This taxpayer's taxable income level exposes her income to 5 different tax rates, the highest being the 33% rate. The amounts of income exposed to each different rate are shown, as well as the tax generated at each rate and the total tax (of $82,607*). If this taxpayer's gross income (before deductions and exemptions) is $340,000 then her effective tax rate is $82,607/$340,000 = 24.3%.

Effective tax rates, while useful, can be misleading. Say, for example, this taxpayer was thinking about increasing her contribution to her 401K plan by $10,000. If she was analyzing her situation using her effective rate she would conclude this increased contribution would save her $2,430 (24.3% of $10,000) in taxes per year. However, this analysis is incorrect. Her top marginal rate is 33%. Any reduction in income exposed to taxes comes at that rate. Looking at the graph it comes off the top of the stack. Instead of saving $2,430 in taxes she would be saving $3,300 (33% of $10,000). Nearly $900 more in tax benefits than she originally believed.

Some quick math shows that her $10,000 contribution to her 401K results in an immediate tax savings of $3,300 - an instantaneous return on investment of 33%. If an investment advisor was promising you that kind of return I'd tell you it was a scam - too good to be true, but in this case the numbers are very, very real. You can create your own stellar ROI just by saving taxes at your top marginal rate.

The most important thing to remember from this post is that any tax savings you come up with are at your top marginal rate. If you have any questions or concerns, please contact me.

 

*For this example I have discounted that this taxpayer would also likely be exposed to Alternative Minimum Tax, the Medicare Surtax, and possibly the Net Investment Income Tax.

09 September 2015

There are 79 numbered lines on a (2014) form 1040, and 3 of them are about getting a tax break for college education. Line 34 is the Tuition and Fees Deduction (which is actually an adjustment). Line 50 is for education credits from form 8863 - the American Opportunity Credit (AOC) and Lifetime Learning Credit (LLC). Line 68 is for the refundable portion of the AOC.

You can only use ONE of those credits for any given qualifying higher education expense (QHEE). So, what we all want to know is - which is the best?

The AOC is the best tax benefit for education available. If you qualify for it, you should use it. Unfortunately, the AOC is also the most restrictive. Not everyone qualifies to use it. It can only be used four times per individual, and is only for undergraduate education expenses. If a student is pursuing a graduate degree or is taking longer than four years to get an undergraduate degree you will run out of eligibility for AOC before you run out of college expenses. When that happens you need to choose between the Lifetime Learning Credit and the Tuition and Fees Deduction.

In most cases the Lifetime Learning Credit will provide the greatest tax advantage - but not always. There are times when the Tuition and Fees Deduction will be better. I made the flowchart below that gives some guidance on when LLC is always better, and when Tuition and Fees Deduction is always better. Unfortunately, that leaves some grey area where it might be one or the other, so I left that to "come see me". Any flow chart that covered all of the variables involved would be half eyesore and half comic mess. The flow chart I built is complex enough that I also built a slideshow (bottom of page) you can use to go step-by-step through the flowchart.

tax prep virginia beach education credits flowchart

The value of the Tuition and Fees Deduction depends on your top marginal tax rate. Deductions reduce the amount of your income that is subject to taxes. If you had $4,000 worth of qualifying expenses and your top marginal tax rate was 25%, the benefit to you would be $1,000. But if your top marginal tax rate was 15%, those same $4,000 worth of qualifying expenses would only be worth $600.

Because the Tuition and Fees Deduction is completely phased out for MFJ taxpayers with modified adjusted gross income over $160,000 ($80,000 for single and HoH), the maximum top marginal rate you can be in and still qualify for the Tuition and Fees Deduction is 25%. The cap on qualifying expenses under the Tuition and Fees Deduction is $4,000. Therefore the largest possible benefit of the Tuition and Fees Deduction is $1,000 - the highest qualifying top marginal tax rate (25%) times the highest amount of qualifying expenses ($4,000).

By comparison, the LLC can be worth up to $2,000. It is a tax credit given at the fixed rate of 20% on the first $10,000 of QHEE. If you have the maximum qualifying expenses ($10,000) you can take a tax credit for 20% of that amount, or $2,000. Therefore, anytime your qualifying expenses exceed $5,000, you will always take the LLC, because your credit will be over $1,000 and eclipse the highest possible benefit of the Tuition and Fees Deduction which tops out at $1,000.

The Lifetime Learning Credit is phased out at a lower income threshold than the Tuition and Fees Deduction. If you're MFJ with an MAGI over $128,000 you cannot claim the LLC. $64,000 for single and HoH filers. (A reduction of the LLC benefit begins at $108,000 and $54,000 respectively.) If your income gets you completely phased out of LLC, you may still qualify for the Tuition and Fees Deduction.

The different phaseout ranges, different tax rates, and differing levels of qualifying expenses add too many variables to construct a flowchart covering ALL of the possibilities. If you don't fall into either the obviously Lifetime Learning Credit category (over $5,000 of qualifying expenses), or the obviously Tuition and Fees Deduction category (income too high for LLC) then you should come see me. I'll help you figure out the most advantageous tax benefit for your situation. With two children in college, tax credits for education are near and dear to my heart. They can be a bit complex, but I don't mind spending extra time discussing them. If you have questions, just ask.

 

02 September 2015

The Net Investment Income Tax (NIIT) has been in effect since 2013. It provides for an additional surtax on investment income for taxpayers with MAGI over a threshold specific to their tax filing status. I have found that most people do not understand the NIIT. Probably because it is new and because the IRS description is written like this:

For the Net Investment Income Tax, modified adjusted gross income is adjusted gross income (Form 1040, Line 37) increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI. See section 1.1411-10(e) of the final regulations.

Clear as mud.

Let me try to break this down to make it understandable. There are 4 elements to the NIIT:

  • Statutory MAGI Thresholds
  • Calculating your MAGI
  • Definition of Net Investment Income
  • Determining the lesser amount to be taxed

First let's look at the statutory MAGI thresholds:

Federal Filing Status  MAGI Threshold Amount
 MFJ and QW  $250,000
 Single and HoH  $200,000
 MFS  $125,000

If your MAGI is above the applicable threshold amount for your filing status, you will owe the Net Investment Income Tax on Net Investment Income. Note: these threshold amounts are not indexed for inflation, so each year more and more taxpayers will find themselves paying NIIT.

Calculating MAGI. MAGI for the NIIT is your AGI plus any amounts excluded as foreign earned income, income from controlled foreign corporations, or income from passive foreign investment companies. Most taxpayers do not have income from foreign sources, so in most cases the NIIT MAGI will just be the same as AGI.

Definition of Net Investment Income. Net Investment Income includes interest, dividends, capital gains, rental income, non-qualified annuities, trust income, and passive business income (i.e. limited partnerships). There are a few others listed on form 8960, but the sources of income listed above will cover 98% of taxpayers. If you have other forms of investment income you are probably sophisticated enough to know what they are and their impact on your NIIT.

Last, but not least, you have to determine which is the lesser amount - your Net Investment Income, or the amount by which you exceed your MAGI threshold. Let's look at a few scenarios.

Don is single and his only source of income is the rents he collects on the dozen houses he owns. He collected $93,000 in rental income in 2014. He had no adjustments to income. His MAGI for NIIT purposes is $93,000. This is below Don's statutory MAGI threshold. He does not owe NIIT.

Janice is single and earned $190,000 in salary in 2014. She also had interest income, capital gains, and dividends totaling $36,000. She had no adjustments to income. Her MAGI for NIIT purposes is $226,000. The threshold for her filing status is $200,000, which she exceeds by $26,000. We need to compare that amount ($26,000) to her Net Investment Income, which is $36,000. Janice will have to pay NIIT on the lesser of those two amounts - $26,000.

Thomas and Traci are married and file jointly. Thomas earned $140,000 in salary in 2014. Traci earned $155,000 in salary. They also has $1,600 in CD interest. They took a $2,500 adjustment for student loan interest paid. Their MAGI for NIIT purposes is $294,100 [$140,000 + $155,000 + $1,600 - $2,500]. They exceed the NIIT threshold for their filing status by $44,100. Their Net Investment Income was $1,600. They will owe NIIT on the lesser amount of $1,600.

Jeff is single. When his father passed he left Jeff a trust that generated $310,000 of income to Jeff in 2014. Jeff had no other sources of income and no adjustments to income. His MAGI exceeds the threshold for his filing status by $110,000. He has $310,000 of Net Investment Income. He will pay NIIT on the lesser amount of $110,000.

The Net Investment Income Tax is another reason to get as much of your investment portfolio as possible into tax-qualified accounts where it does not count as income. If you would like some advice on how to do that, come see me.

 

30 August 2015

virginia beach tax preparerJust spent 2 days at the National Association of Tax Professionals (NATP) annual Forum & Expo at the Rio Hotel in Las Vegas. This was my first time attending this event, but I do not think it will be my last. I had a great time hanging out with my fellow tax nerds, and received my required continuing education credits for both CFP and Tax Pro - delivered by experts in a great environment.  And...well...did I mention it was in Las Vegas? 

My biggest regret is that there were classes I couldn't take because there was not enough time. There were 24 offerings, and only 8 class sessions, so I had to try to be selective. I think I did well, getting some great insights on Schedule C and Schedule E, and a fantastic briefing on how to be the most effective when representing clients before the IRS. I feel very good that I got my money's worth.

I did OK at the poker tables, too. Of course, I left the poker winnings at the craps tables, but that's another story. I might be able to write all of that off my taxes, though, because I met a woman from Virginia who had recently started her own cleaning business and was looking for some tax advice. If I had a substantive discussion with her about her tax situation while betting on dice, wouldn't that conversation mean that the gambling was covered as a necessary business entertainment expense? 

Perhaps I should leave the tax weenie humor for others...

Anyway, my hat is off to the great people at NATP for a fantastic Forum & Expo. I joined NATP so I would have access to high quality research at tax time. I didn't know they were also going to make my continuing education fun and affordable, too.  Really, really happy I attended that event. Now if I could just take a decent selfie...

 

22 August 2015

Taxpayers can deduct up to $2,500 of student loan interest from their federal taxes each year by taking an above the line adjustment. Essentially, that means you can take the student loan interest deduction even if you use the standard deduction when you file. Lenders are required to report student loan interest to taxpayers on form 1098-E. If you have mulitple student loans you will receive multiple forms 1098-E. If your total interest payments for the year exceed $2,500 you are out of luck. $2,500 is the cap, and there is no carryover to subsequent tax years.

1098E virginia beach tax prep

While form 1098-E is quite handy, it may also be misleading. It may not include everything you can deduct as student loan interest. The law allows some expenses to be deducted as student loan interest by the taxpayer, but does not require the lender to report them on the 1098-E.

Deductible Student Loan Interest NOT Reported On Form 1098-E:

Loan Origination Fees were not required to be reported as interest on 1098-E for loans taken out prior to Sept 1, 2004.  Loan origination fees are typically withheld from the loan when it is secured by the borrower. For example, Tammy takes a $10,000 student loan with a 3% origination fee. The lender only delivers $9,700 to Tammy, and keeps the $300 (3%) loan origination fee. That fee is interest, and can be deducted from your taxes using (according to the IRS) any reasonable method that allocates the loan origination fee over the term of the loan. If the term on Tammy's loan is 10 years, she can deduct $30/year from her taxes as student loan interest due to the loan origination fees. If you are still paying on student loans originating in 2003 or earlier find out if there were origination fees you could be deducting.

Capitalized Interest is unpaid interest that is added to the principal of the loan by the lender. This typically happens when loans are consolidated or refinanced - any accrued, but unpaid interest is added to the principal of the new loan. In the bank's eyes that money is now principal, but in the eyes of the IRS it still qualifies as interest and can be deducted in the year it is paid. Figuring the part of your payments that are due to capitalized interest can be tricky. It's a complex math problem I'm not going to try to explain here. Come see me if you have questions about it.

Credit Card Interest can count as student loan interest. (Wait!, What!?!) You read that right, credit card interest can count as student loan interest. To qualify the credit card must be used for qualifying higher education expenses (QHEE), and QHEEs must be the only thing on the credit card. If you're using your credit card to fill gaps in your education funding, it's probably worth it to have a specific credit card set aside to use exclusively for education spending.

Interest on Home Equity Loans/Lines of Credit can also be written off as student loan interest under the same rules as credit card interest. The expenses must be QHEE, and the only expenses on the loan must be QHEE. If you take out the home equity loan for education, you're good. If you take out the loan for education and a boat, you can't deduct the interest.

QHEE for the student loan interest deduction include tuition, fees, room and board, books, equipment, supplies, transportation, and other necessary expenses to attend higher education classes.

There are some limitations on who can deduct student loan interest. If your filing status is single, head of household, or qualifying widow(er), then the deduction begins to phase out at MAGI of $65,000; completely gone at $80,000. If your filing status is married filing jointly the deduction begins to phase out at MAGI of $130,000; completely gone at $160,000. If your filing status is married filing separately you do not qualify for the student loan interest deduction.

If you qualify for the student loan interest deduction be sure you are deducting ALL of the allowable interest - not just what is on your form 1098-E. If you are still planning your college financing, it is worth it to consider all available tax benefits.

18 August 2015

Inheritances are generally not taxable to the recipient. When due, estate taxes should be paid by the estate before the beneficiary receives the assets. An exception to this rule is with traditional Individual Retirement Arrangements (IRAs) when inherited by someone other than the spouse of the deceased. When a traditional IRA is inherited by a non-spouse the recipient must pay income taxes on it for the year they take a distribution of the money from the IRA.

Roth IRAs are different. If the inherited IRA is a Roth IRA then the money should be tax free for the beneficiary to withdraw at any time. (The exception would be if the Roth IRA was less than 5 years old when the original owner died.)

Given that spouses can inherit IRAs tax free, and Roth IRAs can also be inherited tax free, the rest of this post is about non-spouses inheriting traditional IRAs.

When a non-spouse inherits a traditional IRA there are some choices to be made - and those choices may have significant tax consequences. The beneficiary chooses whether to liquidate the IRA right away, or turn it into a "stretch IRA" by taking Required Minimum Distributions (RMDs) each year. The amount of the RMD each year is calculated using IRS actuarial tables for life expectancy on this handy worksheet.

If the decedent was over 70 1/2 when they died the beneficiary has a choice between taking the RMD based on their own age, or taking the RMD based on the decedent's age. The younger the person taking the RMD is, the lower the RMD they must take each year. Lower RMDs mean a longer stretch of the IRA. The chart below summarizes the options for the beneficiary. (I stipulated individuals because the rules are different if the beneficiary of the IRA is an estate or trust.)

inherited IRA virginia beach tax service

The most tax efficient option is to stretch the distribution of the inherited IRA for as long as possible. Distributions from an inherited IRA are counted as income. Liquidating the IRA within 5 years triggers income taxes on the distributions in the year(s) they are received. If the IRA is sizable you may find yourself paying taxes in a higher tax bracket than you ordinarily pay. If your normal AGI is $50K and you take $100K out of an inherited IRA, your AGI will jump to $150K that year, resulting in a much higher tax bill. Additionally, you lose the tax-deferred growth opportunity of leaving the bulk of the money in the IRA. Liquidating an inherited IRA should only be done if you have an urgent need for the money.

If the Deceased was over 70 1/2 when they died and you elect to stretch the IRA by taking RMDs, you can choose to take RMDs based on your age or the age of the Deceased. The most tax efficient choice is to take RMDs based on the age of the younger person. If you were older than the Deceased when they died, then you would use the Deceased's age to calculate RMDs. Otherwise, use your own age.

If you intend to stretch the IRA and take RMDs, you are on the clock. If you fail to take an RMD before 31 December of the year following the year the person died, then you are forced to liquidate within 5 years.

I have prepared the taxes for a few people who had liquidated an inherited IRA and were shocked to discover they had given themselves a substantial tax bill as a result. The states with income taxes will also tax IRA distributions. Even military service members need to beware. Your home of record might not tax your military pay, but they may very well want a piece of that inherited IRA.

If you have questions the time to ask is before you select how you want to handle the inherited IRA. Once you have received the distribution it is generally too late.

 

16 August 2015

The Child and Dependent Care Credit (CDCC) provides a tax credit to taxpayers who purchase daycare for a young child or a family member/dependent with a disability. You can claim up to $3,000 of expenses for the daycare for one qualifying person who needs care, and up to $6,000 of the expenses if you are paying for the daycare of more than one qualifying person.  Unfortunately, the actual tax credit is not the same as the expenses you can claim. The credit is somewhere between 20% and 35% of your qualifying expenses, depending on your EARNED income.

There are quite a few rules and stipulations regarding the CDCC.

  • The person you are providing daycare for must be:
    • A Qualifying Child on your tax return under the age of 13. (You can still get the credit for the part of the year your child was under 13 if they turned 13 during the tax year.)
    • OR your disabled spouse
    • OR any disabled person you can claim as a dependent, EVEN IF they made over $4,000 or filed a joint tax return (You cannot normally claim someone who is not your child as a dependent if they earned more than the personal exemption amount ($4,000 in 2015). There is an exception to that rule for the purpose of claiming CDCC.)
  • The taxpayer must:
    • File single, jointly, head of household, or qualifying widower. If you are married filing separately you generally cannot take the credit unless you also meet the conditions of being considered unmarried.
    • AND work, look for work, or attend classes full time. If you file jointly, both spouses must meet this requirement. (You cannot take the CDCC to do volunteer work or to have a 'play day'. You must have a job or be a student.)
    • AND have earned income.
    • AND not claim the credit if the person paid to provide daycare was your spouse or dependent, or the parent of your child.
    • AND provide the required information about the daycare provider.
  • Qualifying Expenses are the lesser of:
    • Actual Expenses
    • $3,000 for one dependent, $6,000 for two or more
    • The amount of earned income of the tax payer (lowest paid spouse if filing jointly).
  • Fees for overnight camps, private schools, or tutoring programs are NOT qualified expenses.

Tax Tip: You can take up to the $6,000 in qualifying expenses for one child in daycare, as long as you have two (or more) qualifying dependents.

Example: Tina works and has two children ages 4 and 12. The 4-year-old goes to Sunshine Valley Daycare Center during the day while Tina works. The cost of Sunshine Valley Daycare Center is $9,000 per year. The 12-year-old goes to school during the day. After school the 12-year-old rides with a friend and the friend's mother to a scouts meeting, which is not a qualifying daycare provider. Tina picks the 12-year-old up from the scouts meeting on her way home from work. Although she is only paying daycare for one child, for the purposes of the CDCC Tina has two qualifying children. Therefore she can use the $6,000 limit on qualifying expenses when she figures her CDCC.

Most people with child or dependent care expenses roll their eyes when they find out the qualifying expenses are limited to $3,000 for a single child. The actual expenses for most daycare are considerably higher. I'd like to see the limit on allowable expenses raised, but that will take an act of Congress. Until we get one we will take what we can get and work to get the largest child and dependent care credit  the law allows.

11 August 2015

Unlike the federal and state authorities, Virginia Beach does not have an income tax. This doesn't mean Virginia Beach doesn't collect taxes, of course. Like any government the city of Virginia Beach needs revenue to provide services such as police and fire protection, snow removal, trash collection, etc.

Looking at the chart of revenue streams below you can see Virginia Beach has quite a few sources of income. The two I am going to discuss in this post are the two that can be itemized on Schedule A of the federal individual income tax return; real estate taxes and personal property taxes. Together these two taxes account for nearly 36% of the revenue for the city of Virginia Beach.

tax prep virginia beach revenues

It is not uncommon for people to confuse real estate taxes with personal property taxes. Most of us consider our home to be personal property - and it is - but for tax purposes real estate is taxed differently than other types of personal property. Therefore we have real estate taxes on real estate and personal property taxes on taxable property other than real estate.

Most of the local governments like to describe the tax rates for real estate and personal property in terms of dollars/$100, and Virginia Beach is no exception (i.e. the personal property tax rate on cars is listed as $4/$100). I am going to convert these rates to a percentage because I find that easier to work with. Just realize that makes the rates I am posting unofficial.

Virginia Beach taxes personal property at the following rates:

 Type of Personal Property Annual Tax Based on Assessed Value 
Cars, trucks, trailers (work), motorcycles, and aircraft  4%
Privately owned recreational watercraft (boats)  0.000001%
All other boats  1.5%
RVs, campers, horse trailers 1.5%
Vehicles for elderly or disabled 3%
Vehicles for disabled veterans 1.5%
Mobile Homes 0.93%

To qualify for the reduced rate on vehicles for the elderly and disabled the Virginia Beach resident must be age 65 or over by December 31 of the previous year OR permanently and totally disabled AND combined gross annual income (including social security) may not exceed $29,500. The reduced rate is only applicable to one vehicle. Additional details here.

Veterans who are permanently and totally disabled due to a service-connected event can qualify for a reduced personal property tax rate on one vehicle. Additional details here.

Elderly and/or disabled residents of Virginia Beach can get an exemption from the mobile home tax if over 65 by December 31 of the previous year OR permanently disabled AND gross household income is $64,675 or less. More details here.

The 0.000001% tax on recreational boats is a placeholder. There is essentially no tax charged on recreational boats at this time, but if the city decides to collect such a tax in the future they don't have to change the law - they just have to change the rate.

Military personnel stationed in Virginia Beach can obtain an exemption from personal property taxes by mailing a copy of a current LES to the Virginia Beach Tax Assessor's office.

You can appeal the assessed value of your personal property if you believe the tax assessor's valuation is too high. Details can be found here.

Virginia Beach Real Estate Taxes

Location in Virginia Beach  Tax Rate on 100% of Assessed Value 
General  0.99%
Sandbridge  1.05%
Central Business District South  1.44%
Old Donation Creek 1.174%
Bayville Creek 1.353%
Shadowlawn 1.1494%
Chesopeian Colony 1.2813%
Harbour Point 1.069%
Gills Cove 1.053%
Hurds Cove 1.428%

The named areas are known as Special Service Districts (SSDs). The city is charging the waterfront homeowners in the SSDs a higher real estate tax rate to pay for dredging operations to maintain beaches and navigable water channels.

Elderly and/or disabled residents may qualify for an exemption for some or all of their real estate tax if they are over 65 OR permanently and totally disabled AND their household income is not more than $50,668 (disabled residents get a $10,000 income exclusion allowance). Additionally, you can't have more than $350,000 in assets. You must reside in the Virginia Beach home to get the exemption for the real estate taxes (second/vacation homes do not qualify). Additional details here.

There are also real estate tax breaks for energy efficient buildings as well as buildings listed in the Virginia Landmarks Register. Find additional details here.

If you itemize deductions on your federal income tax return you can deduct your real estate and personal property taxes (unless you are paying AMT).  This effectively removes them from your Virginia state income tax return as well. It turns out to be a substantial deduction for most people. For example, a Virginia Beach home valued at $300,000 would generate real estate taxes of $2,970. A taxpayer in the 25% top marginal rate for federal taxes (and 5.75% for Virginia) would knock $913 off his/her combined federal and state income tax bill for the year by itemizing that $2,970 as a deduction on Schedule A. Paying $913 less (or getting $913 more refunded) is pretty good money for filing your taxes properly. See me if you have questions.

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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