Robin Hood and the Borderline Itemizers

by Bill Tracy

I am pleased to report that Robin Hood is alive and well in Virginia! Most taxpayers are now receiving a state tax rebate courtesy Governor Ralph Northam and the General Assembly. Eligible taxpayers may receive up to $110 for individual filers and up to $220 for a married couple filing jointly.

But, hey, wait one minute! Where the heck is all of this “income redistribution” cash coming from? Taxpayers like me, of course, had their state taxes increased substantially. If you will recall, about a year ago, Gov Northam was saying that some Virginia taxpayers have been underpaying taxes, and he aimed to fix that by increasing them.

Who were these deadbeat Virginia taxpayers? Some are senior citizens like me who have committed the “crime” of not having enough itemized deductions to meet the new higher Federal standard deduction. As senior citizens, my wife and I now have to come up with $26,600 of itemized deductions or suffer the consequences of Virginia’s new tax bite.

Approximately $1,035 is the maximum size of the new state tax increase for married couples fling jointly, starting 2018. This represents an increase of historic proportions. Yet it seems as if most Virginians either politically favor this tax increase or are oblivious to the fact that it happened.

Our elected officials claim that this tax increase was automatic and unpreventable, due the Trump administration’s Tax Reform and Jobs Act of 2017 (TCJA). But is not true. Other states (eg; New York) adapted to TCJA by allowing their residents to continue itemizing deductions on their state tax returns.

It turned out that Maryland, along with Virginia, are apparently the two states that decided to punish taxpayers in this category. I call us victims the “borderline itemizers”.

Whereas death and taxes are reportedly unavoidable, let’s talk about year-end tax strategies in the new tax world. Thanks to Steve Haner’s 2018 articles here on Bacon’s Rebellion, I have personally avoided paying this new tax penalty, by taking evasive actions.

Borderline itemizers now need to  consider not taking the new federal standard deduction on their Form 1040. In other words, you may be better off taking a loss on your federal tax return to prevent a larger loss on your Virginia Form 760.

But such an approach is damage control. If you really want to minimize taxes. you need to find proactive ways to escape Virginia’s new tax bite. My personal approaches to date have included income reduction in 2018, and increasing itemized deductions in 2019 by lumping donations.

The income-reduction strategy makes tremendous sense in Virginia if you can do it. As baby boomer retirees, my wife and I have considerable control over our own income. I find that, if we can keep our household income below about $100,000, Virginia is among the most tax-friendly states. As soon as we get much above $100,000 of taxable income, Virginia surprisingly transforms into a much less tax-friendly state for retirees. In 2018, our income-reduction strategy also helped us to qualify for medical itemized deductions, so we ended up with a nifty tax “double-play” — actually a triple play if we include the $220 bonus we’re about to receive from Uncle Ralph.

Of course low income is not always the best solution. For example, baby boomer retirees are supposed to be intentionally withdrawing excess money out of their retirement savings to convert it to a Roth IRA. Faced with higher income, to avoid Virginia’s new tax bite, the goal then becomes finding new ways to itemize deductions.

Becoming popular now are Donor Advised Funds (DAFs) which allow lumping donations into a single year’s tax return. Many financial institutions offer DAFs.  Fidelity Investments has one popular program, which allows a lower starting amount ($5000) and donations as low as $50. So I personally just opened a new DAF account.

What are we going to do in 2020 and beyond? Who knows? But there are several more creative tricks in the donation category. How about… maybe our family will move out of NoVA to rural Virginia? Just kidding, we are pretty much stuck here. Furthermore, I fear there might be a new NoVA tax: If we move, we have to pay to leave.

They get you coming and going around here.

Bill Tracy, a retired engineer, lives in Northern Virginia.