New Tax Legislation to Increase Virginia Resident Tax Liability

Virginia taxpayers should prepare for possible increases in their state income tax liability come 2019. 

As a consequence the Tax Reform and Jobs Act (the Act) passed by Congress December 2017, Virginia taxpayers will potentially see an increase when they go to file their 2018 tax return. 

Under the Virginia tax code, if a resident files an itemized federal tax return they must also file an itemized Virginia tax return. Likewise, if they file a federal tax return claiming the standard deduction they must also claim the standard deduction on their Virginia return. 

Put simply, filing a federal standard deduction will make your taxes simpler but it will ultimately cost you more when you file that same standard deduction at the state level. 

Let’s consider an example to illustrate this point. 

Married couple Jack and Jill Hill have a mortgage, pay real estate taxes, contribute to local charities, and pay personal property taxes on two cars. In this example, all of these itemized deductions equate to $20,000. 

Prior to 2018, the Hill family would file an itemized federal tax return reducing their federal taxable income by $20,000. They would do the same on their Virginia tax return thus reducing their taxable income by $20,000. Less taxable income, less taxes. The Hill family is happy. 

Fast-forward to today. Using the federal standard deduction under the Tax Reform and Jobs Act, the Hill family will not file an itemized federal tax return. Under the new tax code, they would take a $24,000 federal standard deduction. 

That’s a bigger deduction so that means less taxes, right? You’d think so…

When the Hill family files their Virginia tax return using the Virginia standard deduction, their taxable income will only reduce by $6,000, which is the Virginia standard deduction amount. The $14,000 loss deduction on the Virginia tax return for the Hill family equates to a $805 higher state tax liability. Even with the higher federal standard deduction, the lower deduction at the state-level will equate to a greater total tax liability in this example. 

Disappointing. More taxes will ultimately be owed. The Hill family is caught off guard and owes taxes they didn't plan for.

Creating a simpler tax code is critical but in many ways, the Act as written may create a greater tax liability on Virginia residents. 

‘Surprise’ and ‘tax’ shouldn’t be in the same sentence (except for this one). Learn from Jack and Jill Hill’s mistakes and contact a certified public accountant today to plan your 2018 tax strategy and adjust accordingly.

The good news is you can choose how to file your taxes. Your family can use either the standard or itemized deduction. Which deduction is best for your family? Each tax situation is different and we are here to guide you through which option is best for you. 

Contact us today for a free consultation with Managing Partner Patrick Marek, CPA.