Winners & Losers; The Politics; Expert Accountants Opinion
Taxpayer Winners & Losers
Federal tax reform is projected to result in a Virginia state windfall of over a half billion dollars … $594 million to be exact. The reason is that many Virginia taxpayers will pay higher state taxes this year. Why?
Under the Tax Cuts and Jobs Act (TCJA), the standard deduction has been significantly increased to the point that many federal taxpayers will choose the new standard deduction rather than continue itemizing. Traditionally, Virginia tax law has conformed to federal. However, that is not the case today as the state standard deduction has not been increased to track with the revised federal rules.
The result is that more than 25 percent of Virginia taxpayers will see an increase in their state taxes. That said in most cases the increase will be more than offset by cuts in their federal tax bill. While that appears to be accurate, a state analysis says that many middle-income families will pay proportionally more in state taxes than they will receive in federal tax benefits.
So the issue is less the net financial effect on taxpayers which appears to be minimal … and more the political realities to apply the windfall to benefit voters. Here’s a quick rundown on suggestions and reactions from both the Democrat and Republican leadership.
Governor Ralph Northam sees this unexpected treasure-chest as “a chance for us to level the playing field” for Virginians who make less than $50,000 and realize fewer benefits proportionally than their more financially fortunate fellow residents of the Commonwealth. Northam’s proposal is to do so by giving lower-income families the full value of the earned income tax credit.
Briefly, the earned income tax credit applies to individuals and couples in four income brackets with provisions based on the number of child dependents in the household. Under current Virginia tax law, the credit applies to reduce the taxpayer’s tax liability – but not to exceed the amount owed. The governor seeks to expand that benefit to equal all of the credit with any excess over the tax liability paid out as a tax refund.
Predictably, with Republicans controlling both legislative chambers, Northam has a tough row to hoe. In contrast, leadership of the prevailing Republicans leans toward more comprehensive tax reform.
Among the issues to be resolved are what to do with this year’s windfall and should Virginia tax law be changed to conform to federal rules. The latter decision is further complicated by the fact that the federal standard deduction rules may disappear in 2025 … along with most of the Virginia windfall.
Expert Accountant Opinion
Late last month, no lesser body than the Virginia Society of Certified Public Accountants (VSCPA) weighed in on the controversy. The Society urges lawmakers to swiftly act to revise the state’s tax code to mirror the new federal tax law.
Emphasizing this request, the Society has expressed this action as a top priority in an eight page White Paper. The Society’s position competes with proposals by Gov. Ralph Northam and Republican legislators. The major arguments presented by the VSCPA in support of their appeal come down to four:
• A change in early January by the General Assembly will allow taxpayers and their accountants to prepare 2018 tax year returns that reflect like provisions of the TCJA.
• “Minimize complexity and streamline tax administration and compliance.”
• Eliminate tax penalties “due to uncertainty regarding the adoption of federal changes by Virginia.”
• “Sequester any new revenue gained for the calendar year 2018 by conforming to federal law until a decision on policy is made, which is similar to the action Virginia took after the sweeping new federal law in 1986.”
There are three primary options on the table in light of the TCJA reforms:
• Northam’s proposal to not alter state tax law to conform to the new federal regulations plus allow Virginians to receive the full benefit of the earned income tax credit.
• Republican legislative leaders generally lean towards policy changes that allow taxpayers to continue itemizing deductions on their state tax returns even if they decide to claim the standard deduction …doubled under the new law … on their federal returns.
• The VSCPA assertion that, “Full conformity with federal law is the starting point for comprehensive tax reform.”
Stay tuned. We’ll keep you posted as the debate unfolds.
Planning is the No. 1 thing we do at Blair + Assoc for clients to minimize taxes and maximize net income. The above article is but one consideration for Virginia taxpayers to be aware as we approach end-of-year tax planning.
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