19 August 2018
In most aspects Virginia laws conform to federal income tax laws. This is somewhat evident when you notice the first line on your Virginia tax return is your federal adjusted gross income. In essence, Virginia is just saying, “We accept all the federal definitions of income and adjustments as our opening argument.”
That said, there are distinct differences between the Virginia tax system and the federal tax system. These are sometimes confusing and I find myself frequently answering questions with the phrase, “That’s true on your federal tax return, but not on your virginia tax return.”
Here are twelve examples of the differences between Virginia tax law and federal tax law:
- Virginia tax return is due May 1. While your federal tax return is due on or about April 15, your Virginia return is not due until on or about May 1. I think that’s a nod to the first line on the Virginia return being your federal AGI. You can’t complete your Virginia return until you have completed your federal return, so Virginia gives you 2 weeks after you have completed your federal return to complete your Virginia return.
- There is no Head of Household filing status in Virginia. There isn’t a Qualifying Widow(er) status either. In Virginia you are Single or you are Married and filing jointly, or Married and filing separately. Just 3 filing statuses in Virginia compared to 5 for federal.
- Virginia does not tax Social Security benefits. While the federal government has a (difficult to understand) sliding scale that will tax somewhere between 0% and 85% of your Social Security, Virginia just subtracts it out of your income altogether. The Commonwealth has some good benefits for our seasoned citizens, and that is one of them!
- You can’t deduct state income taxes from your Virginia income taxes. (Although you may qualify for a credit known as the OSC.) State income taxes paid can be an itemized deduction on your federal income taxes, but not on your Virginia return. However, if you are paying taxes to another state you may qualify for the Other State tax Credit (OSC), which essentially prevents you from paying income tax to more than one state on the same income (provided one of those states is Virginia!)
- The standard deduction is $3,000 for single people and $6,000 for married filing jointly. Federal standard deductions went up significantly this year as part of the tax reform passed in December 2017. Not so in Virginia (not yet, anyway). This could be significant as your Virginia deduction method (standard or itemized) must match your federal tax return.
- There is only one set of ‘tax brackets’. For federal taxes the rate of taxation changes depending on your filing status. A taxpayer filing head of household will generally pay lower taxes on the same amount of income compared to a taxpayer filing as single. It’s one-size-fits-all in Virginia. No matter your filing status your tax rates are the same. Additionally, there are no preferential tax rates for different types of income. Capital gains and qualified dividends get taxed at the same rate as regular wages in the Commonwealth.
- Childcare is a deduction, not a credit. Both Virginia and the federal government provide a tax benefit for households where both parents are working and childcare is required for young children. While the IRS figures the benefit as a credit, Virginia does it as a straight up deduction. (And neither comes anywhere close to offsetting what people are actually paying for childcare!)
- No tax credits for children or education. After you figure the tax you owe on your taxable income, the federal government provides ‘family friendly’ tax credits for higher education and for having minor children living in your home. Virginia does not provide similar tax credits. (I find this is often the reason a client will receive a refund from the federal government, yet owe Virginia money.)
- No bonus depreciation. This is a complicated difference, but it can have a big impact on business owners and some landlords. The federal government currently allows for aggressive accelerated cost recovery of business equipment known as ‘bonus depreciation’. Virginia does not conform to this accelerated bonus depreciation regimen. This can result in the cost recovery (through depreciation expensing) for your business property occurring at different rates on your Virginia and federal returns. You should consult a tax professional if you think this may impact you.
- You can deduct 529 contributions. I am a big fan of the Virginia 529 plans, and one of the primary reasons is the tax deduction you can get on your Virginia tax return for your contributions. Both the federal government and Virginia give tax free treatment to the account if it is used for education, but only Virginia gives you the deduction for the contribution. 5.75% guaranteed return on my money via tax deductions? Sign me up!
- Military pay subtraction. Neither the federal government nor Virginia will tax military pay earned in a combat zone, but only Virginia provides the opportunity to avoid taxes on some or all of your military pay via the military pay subtraction. This allows you to subtract up to $15,000 of your military pay from your Virginia taxes. There are specific rules and limitations, but it’s a nice benefit for those who can use it!
- Extensions are automatic. If you can’t get your federal return filed by April 15 you can get an automatic 6-month filing extension by filing form 4868. If you can’t get your Virginia return filed by May 1 you can get an automatic 6-month filing extension by doing nothing! That’s right - if Virginia doesn’t receive your tax return by May 1, you are automatically granted a filing extension to November 1. You will be subject to penalties and interest if you don’t pay all the taxes you owe by May 1, but there is no penalty for late filing until November 1, and you don’t have to do anything to get it!
A Virginia income tax return is more like the federal return than it is different from it. The differences, however, can make a real impact on your bottom line. Hopefully this article shed some light on those differences. If you still have questions, don't hesitate to contact me!