By Terry Barrett, CPA, Tax Senior Manager | State and Local Tax Team
Last week it appeared the Virginia tax filing season would be delayed due to a lack of consensus by the General Assembly on legislation conforming Virginia’s income tax law to the Internal Revenue Code and the provisions of the Tax Cuts and Jobs Act (the “TCJA”). However, emergency legislation effective immediately was signed into law by Governor Northam last Friday, February 15, allowing the tax season to get back on track.
Virginia Income Tax Law Conformity
The legislation conforms Virginia law to the Internal Revenue Code as of December 31, 2018, except where Virginia has traditionally deconformed to federal law, namely with respect to:
- Bonus depreciation allowed for certain assets under federal law;
- The five-year carry-back of net operating losses generated in certain taxable years; and
- Tax exclusions related to the cancellation of debt income or the application of high yield debt obligations.
Thus, nothing has changed with these areas of deconformity. However, for taxable years beginning on and after January 1, 2019, Virginia also will deconform to the TCJA’s suspension of the Pease limitation. The Pease limitation phased out three percent of a taxpayer's itemized deductions once income crossed a certain threshold, so at the federal level the removal of the Pease limitation provides a further reduction in marginal tax rates for upper-income individuals. Virginia, however, will keep the limitation on itemized deductions when incomes exceed certain thresholds.
The key provisions of the law as agreed to by the General Assembly and Governor are:
Effective for taxable years beginning January 1, 2018:
- An individual and corporate income tax subtraction for 20 percent of the amount of business interest that is disallowed as a deduction for federal income tax purposes (commonly referred to as § 163(j) interest); and
- Expansion of Virginia’s corporate income tax subtraction for subpart F income (foreign income) to include global intangible low-taxed income (“GILTI”), meaning the GILTI could also be deducted to the extent it is included in a taxpayer’s federal taxable income.
Effective for taxable years beginning on and after January 1, 2019 but before January 1, 2026:
- An increase Virginia’s standard deduction from $3,000 to $4,500 for individuals and those married but filing separate returns, and from $6,000 to $9,000 for those married filing joint returns.
Effective for taxable years beginning January 1, 2019:
- An individual income tax deduction of the actual amount of real and personal property taxes imposed by Virginia or any other taxing jurisdiction not otherwise allowed as a deduction given the federal limitation on deductions for state/local taxes of $10,000.
Virginia State Tax Refunds
In addition, the legislation provides for refunds of up to $110 to an individual or up to $220 to married persons filing joint returns as compensation for higher state taxes resulting from the federal tax reform. The refunds will be contingent upon taxpayers filing a final return for Taxable Year 2018 before July 1, 2019. The refunds will be allowed up to the amount of the individual/married person’s tax liability after the application of any deductions, subtractions, or credits to which such individual/married person is otherwise entitled. The Department of Taxation must issue the refunds between October 1 and October 15, 2019. The refunds assume, however, there are sufficient state tax revenues resulting from the federal conformity provisions to fund such refunds. Otherwise, the refunds will be prorated based upon available funds.
Finally, the legislation creates a non-reverting fund for any additional revenues resulting from the conformity to the TCJA provisions. The General Assembly is directed to appropriate any revenues in the Fund to make permanent or temporary tax reform measures.
Keiter continues to monitor other legislation affecting Virginia taxpayers and will be providing summaries of this legislation once passed by the General Assembly and approved by the Governor. Questions on Virginia tax conformity and how it impacts you? Contact us. We can help. Keiter Representative | Email | 804.747.0000
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About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.