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.

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10 responses to “Robin Hood and the Borderline Itemizers”

  1. Steve Haner Avatar
    Steve Haner

    Years ago, as a young and inexperienced party spin doctor, I attacked Gov. Baliles for a “Robin Hood” tax scheme. Somebody reminded me that there are few more popular figures in English literature than that famous rogue….People LOVE that idea…

    Here is a wrinkle I learned yesterday. That $220 will be reported to IRS as if it were a tax refund, added onto any refund you got earlier. If you are somebody who uses the standard deduction, no problem. But if you claim itemized deductions on your 2020 state return – and more will this time around – be sure to add that $220 into the income figure. Uncle Sam will want his cut!

    More people will itemize because with the 2020 state return, on your state return you can claim the full deduction for 2019 real estate taxes and personal property taxes, without the $10,000 cap….So confusing.

    I also heard (story idea for someone) that TAX is besieged with phone calls from people who had not heard about the checks in advance, and worry this is some kind of scam.

    1. Steve- importantly sounds like you might be saying the situation I am writing about is being fixed or improved for 2020? That would be nice, and that would say we only have 2 years- 2018/2019 to cope with this.

      I knew that all I really knew was last year 2018…I obviously do not have tax software yet for 2019 and 2020 so I had to go with history. I thought about asking you for the future changes.

      Yes Robin Hood (Men in Tights) is a nice guy. Maybe for Halloween I will write about Dr. Jekyll and Mr. Hyde.

    2. LarrytheG Avatar

      if the money is reported as a refund then it will be included in the tax document sent to you to be used at tax time. No problemo!

      I’m curious what happens when all this stuff “expires” at the Federal Level.

      The REAL SCAM is the TCJA! It’s NOT a permanent tax cut. It’s really a one-time “stimulus” that goes away in 2025 – but not before it balloons the debt to 30 trillion…

      And this thing was foisted on us by folks who call themselves “Conservatives” – fiscal conservatives who say they “hate taxes” so instead of actually cutting spending – they go borrow trillions of dollars to pay for the tax cuts and folks who say they are “conservatives” – they defend it!

      1. I take your point that we now seem to be in a period of changing tax laws both Federal and State. This makes it hard to plan ahead, but if we stay on our toes, we can try to minimize our personal taxes. Seems to me TCJA had some good ideas and maybe some bad ones too. And sounds like Virginia is thinking about how to improve Virginia’s system. As you say, the TCJA was temporary, so we shall see what comes next. Presumably some of the TCJA concepts will stand the test of time, and some may not stand up. I wish they would decide about IRA rules so we retirees can see how many years for Roth IRA conversion we have.

        1. LarrytheG Avatar

          I tend to think ANY tax cut that is essentially funded by debt instead of spending cuts is not good! The only time it is justified is if we are in a recession, and we need to borrow money to gin up the economy, and we’re supposed to pay that debt back in good economic times.

          In that regard the TCJA is an unmitigated disaster and I NOTE that all those folks who were OPPOSED to stimulus/debt under Obama during that economic collapse – now seem to be okay with it with the TCJA.

          No one like to pay taxes – I hate them also but I also hate to pay electric bills and buy fuel for the car… so what?

          Basically the TCJA borrowed money and gave SOME of it to taxpayers and SOME of it to the State and now SOME taxpayers want ALL of it!

  2. LarrytheG Avatar

    Perhaps call all these “techniques” to avoid paying taxes as legalized tax evasion, and we grinch about the “value” of them to us as individuals!

    For instance, the money spent on your health insurance is not taxed at all – no SS, not Feder and not State. The money you put into your 401K is not taxed at the higher rate but a lower rate after you retire. Dividends and investments are not taxed at the regular income rate.
    All the itemized deductions are a de-facto wealth transfer that benefits those that get them and adds to the tax bills of those they can’t.

    IF we took away ALL itemized deductions and fully taxed all money whether it was spent on health insurance or retirement funds – then we’d have no “wealth transfer” and we’d all be taxed equally.

    If you doubt that these tax breaks are funded subsidies in the budget take a look:

  3. Steve Haner Avatar
    Steve Haner

    Numbers 1, 2, 4, 5 and 10 are great for us now. Number 11 is coming up soon. The tax code is written by the people who can afford lobbyists! But in reality, Larry, many of those are income neutral and of greatest value to low and middle income workers. Taxing health insurance provided by the employer would really hike their taxable income, for example.

  4. djrippert Avatar

    “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.”

    Evasive actions? You must mean avoidance actions. Lol.

  5. …oops noted!

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