Original Winner…and Losers
Current Sharing of the Wealth…Hint: Your Check’s in the Mail!
Original Winner & Losers
Federal tax reform resulted in a Virginia state windfall of over a half billion dollars…$594 million to be exact. The reason is that many Virginia taxpayers paid higher state taxes in 2018. Why?
Under the Tax Cuts and Jobs Act (TCJA), the standard deduction was significantly increased to the point that many federal taxpayers chose 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 suffered an average increase of $125 in their state taxes for tax year 2018…as many forfeited the ability to itemize deductions to claim the higher federal deduction.
While many, if not most, Virginia taxpayers will see that increase more than offset by cuts in their federal tax bill…many middle-income families paid proportionally more in state taxes than they received in federal tax benefits.
With this as the background, here’s a rundown on the initial Virginia state intent to apply the windfall, taxpayer backlash and the final decision to benefit Virginia taxpayers with $431 million earmarked for refunds.
Governor Ralph Northam viewed 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 was 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 sought to expand that benefit to equal the entire credit with any excess over the tax liability paid out as a tax refund.
Predictably, with Republicans controlling both legislative chambers, Northam faced opposition to his proposal. The prevailing Republicans tended to lean toward more comprehensive tax reform 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.
That left two main issues to be resolved:
1. What to do with the half-billion dollars + windfall, and
2. Should Virginia tax law be revised to conform to federal rules?
The latter decision was further complicated by the fact that the federal standard deduction rules may disappear in 2025…along with most of the Virginia windfall.
Notably, no lesser body than the Virginia Society of Certified Public Accountants (VSCPA) weighed in on the controversy. The Society urged lawmakers to act and swiftly revise the state’s tax code to mirror the new federal tax law.
The Final Verdict
• No action was taken by Virginia legislators to change the Commonwealth’s tax law to conform to federal rules.
• Governor Northam’s proposal regarding the earned income tax credit was not enacted.
• Most of the windfall amount of $594 million will be refunded to Virginia taxpayers, a total of $431 million.
• The state’s financial reserves have benefited from the addition of the remaining windfall funds.
Who Qualifies for the Refund … and For How Much?
The state is preparing to return $431 million to taxpayers who will receive one-time checks of $110 for individuals and $220 for couples. State officials expect to send refund checks to taxpayers between Sept. 16 and Oct. 15, which is the statutory deadline.
If you are a Virginia taxpayer who filed your state taxes no later than July 1st, with a liability at least as large as the one-time refund, you are eligible for the payment. If sent in after that date, you are NOT eligible.
If you are eligible, you will qualify for the refund whether, or not, you took the standard deduction on your federal return.
An additional exception to eligibility is if your entire tax liability is paid by a state tax credit, such as earned income credits, historic rehabilitation and land preservation.
Be sure to check with your tax professional to ensure an accurate assessment of your status.
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