Virginia Gothic

by Bill Tracy

Following up on Steve Haner’s discussion of Virginia’s handling of the new federal tax laws, I decided to do a “hypothetical” sample calculation.  “Hypothetical” is in quotes, because this example is somewhat similar to my own household, where we are grandparents in retirement.

In this simplified example, the annual income is assumed to be $150,000 withdrawn from retirement savings. Itemized deductions total $28,500 including $7500 state income tax, $7500 property tax, and $13,500 mortgage interest and charitable donations.  Thus the SALT (state and local taxes) exceed the new $10,000 federal limit.

Our hypothetical taxpayers are filing a Married-Joint tax return, and they are Age 65 or older.  Due to being over Age 65, this couple benefits from a larger 2018 Federal Standard Deduction of $26,600 vs. the normal deduction of $24,000 for younger couples.   In our example, the couple’s itemized deductions total $28,500 in 2017, but which is reduced to $23,500 in 2018 with the new SALT deduction limits.  Thus the $26,600 Standard Deduction looks better, but only on the surface.  As you will see below, the plot thickens in 2018 for many Virginians.

Using 2017 as a Base Case, let’s look at the tax payment options available to the couple in 2018:

Option-1 above is currently the best for our couple in 2018, but they are not very happy. Upon completion of their Federal FORM 1040 they are temporarily pleased see $801 tax savings, courtesy President Trump. However, upon filing their Virginia FORM 760, the couple owes Virginia an extra $863, courtesy whomever wants to take the credit for that. So the overall loss is $62 versus the 2017 Base Case.

Option-2 uses itemized deductions, and presents our retired couple with an interesting and rebellious alternative. If they are mad at Virginia, they could elect to itemize deductions, and pay more tax to the Feds, and less to the state. In my actual personal tax projection, right now I think Option-2 probably saves me a few bucks.

Option-3 is the most preferable option for our retired couple, but it requires the General Assembly to change the Virginia tax laws. Virginia tax law currently stipulates that a taxpayer who takes the Federal Standard deduction, cannot itemize taxes for Virginia purposes. It is this Virginia law that prevents our retired couple from taking the modest tax reduction that the new Federal tax law tries to achieve.

(Calculations based on a shareware 2018 Federal Tax estimator, and using 2017 Virginia tax calculator with adjustments for itemized/standard deductions.)

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

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19 responses to “Virginia Gothic”

  1. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    So I was right all along!

    And Virginia wonders why it has a chronic brain drain that will only get worse now with a retired brain drain of thoser who on retirement will leave the state to join their earlier departed kids. Not even the US President can help protect Virginians from their ruling elite.

  2. LarrytheG Avatar

    Well, here’s where the Federal tax cut came from:

    ” The deficit jumped to $779 billion, $113 billion or 17 percent higher than the previous fiscal period, according to a statement from Treasury Secretary Steven Mnuchin and Office of Management and Budget Director Mick Mulvaney. It was larger than any year since 2012, when it topped $1 trillion. The budget shortfall rose to 3.9 percent of U.S. gross domestic product.”

    Now, it’s true, the POTUS has ordered a 5% spending cut but there is a question about whether it applies to the Pentagon.

    The GOP is now talking about cuts to Medicare and Social Security (which makes no sense at all since it is wholly funded from FICA taxes not income). A “cut” to Medicare would manifest itself as an INCREASE in Medicare premiums and/or a CUT in benefits but my suspects are that it’s all talk and no walk, once again….

    So here’s a question for folks – WHY should Virginia “conform” to the Federal tax regs at all – EVER? What’s the benefit to Virginia to do that in the first place?

    At the state level, despite all the talk from the Va GOP – WHERE is any legislation to de-link Virginia from the Fed tax? To this point – the Va GOP is also all talk and no go on that legislation.

    Finally – remember how we hear every year from some politicos how we are going to “simplify” the tax code so we can file our taxes on a post card?

    remember that? HA HAHA bahahahahaha … it’s pretty bad when the folks who do legislation apparently have no clue just how complex the tax code is and end up making it even MORE complex to supposedly “help” us.

    tsk tsk tsk

    1. TooManyTaxes Avatar

      It’s the spending. Record tax collections.

      We need to “castrate” nonprofits to prevent them from influencing the appropriations process. Every nonprofit that uses a paid employee or agent to lobby for them loses its tax exempt status.

      1. “Every nonprofit that uses a paid employee or agent to lobby for them loses its tax exempt status.” HEAR, HEAR! Who wouldn’t love that, other than the non-profits themselves?

  3. Steve Haner Avatar
    Steve Haner

    You missed one key scenario, sir – and that may have been intentional!

    Yep, Virginia has never been a happy tax location for relatively high income retirees. There are indeed a number of people whose situation looks like that, most prevalent in the higher income localities, but it is a subset given that something like 70 percent of the population already takes the standard deduction, and somebody with $30 or $40K or more in available deductions is going to keep on keeping on as before. Secretary Layne in our discussion admits that Option 2 starts to look attractive at about 22K in itemized deductions and given those three choices – do it!

    However, you did not display the option that I have advocated and the tax impact of a doubled standard state deduction – up to $12,000. Would that not produce lower taxes in both columns? Correct me if I’m wrong, sir, but plug that one in and post it here. I think it adds $345 to Column 1 and turns that into a net tax cut. Admittedly not as big a net tax cut as the Column 3, but Column 3 qualifies as having your cake (the federal cut) and eating it too (deviation from conformity for a small subset of taxpayers.)

    1. Steve- Yes your math is correct. I did not mean to suggest that Option-3 was the only tax reform option for Virginia, needed due to the Federal changes. Double of standard deduction could possibly make money for Virginia by getting folks out of the Option-2 choice. To be more like the Feds, there could also need to be a Age 65 addon for the Virginia standard deduction.

      The overall problem now is the Virginia standard deduction is so low ($6000) vs. Federal ($24000-$26600) (for the Married-Joint case), so if the taxpayer stops itemizing , there is a big hit on the state retrun.

    2. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Haner says: “Yep, Virginia has never been a happy tax location for relatively high income retirees.”

      Not smart, Virginia!

      Get Smart, Virginia! You got enough problems already without going around making up new ones for yourself, and for your citizens.

  4. Steve Haner Avatar
    Steve Haner

    Larry, the benefits of conformity are mainly simplicity, uniformity and easier enforcement. But many taxpayers are dealing with more than one state, and a huge percentage of businesses are filing in more than one state, so they really appreciate that simplicity and predictability and are put off by complex local variations. I recently scanned the data and several states simply take the federal AGI and add a state tax percentage to that. NO state rules at all. Federal AGI times 3 percent or something….

    As the calls for various deviations from conformity start to multiply, I hope legislators will realize what a tar baby it will all become -so easy to say, we conform! Call your congressperson or complain to the IRS!

    Personally I have always agreed with moving away from deductions period. Plenty in the GOP used to advocate a flat tax and while it hasn’t moved far, this federal change is a step in that direction for individuals.

  5. Steve Haner Avatar
    Steve Haner

    Ideally Virginia would go to $24k standard deduction for a couple, but the powers that be don’t want to part with the bread. Lots of states are there. DC is there!

    1. LarrytheG Avatar

      Steve – why doesn’t the GOP in Virginia put forth such a simple plan and support it?

      That’s why is perplexing.

      They’re the guys that are always yammering about the complexity and unfairness of the tax system – and this is the perfect opportunity for them to advocate something better – AND put pressure on Northam to defend his not so simple plan!

      We can and should do that for the majority of people who live in Va and only pay taxes in Va. I do volunteer taxes and well over 90% of our clients are Virginia-only.

  6. Steve Haner Avatar
    Steve Haner

    Larry, the General Assembly is still almost three months away so I’m sure some leadership proposal (or more than one) will emerge before the first gavel falls.

    1. LarrytheG Avatar

      Steve – the GOP don’t need to be 3 months away to fire up their PR on this!!!! They could ALSO demand a special session to fix it now! where are they?

    2. Steve- Do you think we could get an early 2019 GA law change that would be retroactive to 2018 tax returns? I guess that is possible, but they’d have to get quickly onto it?

      By the way, the other implication, in addition to your comment that Virginia never tried to have a retiree-friendly tax system, is also that Virginia never tried to have a NoVA friendly tax system either. But the current situation only aggravates both situations.

  7. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    This is a perfect example of how needless and counterproductive complexity is killing us, ruining our society and sanity.

    Why this complexity? Here is why:

    It hides from the public special deals. It earns huge fees for lawyers. It grants special interests bundles of hidden favors. It makes lawmakers feel important. It gives lawmakers far greater power then they would otherwise have, all at the great disadvantage of most taxpayers, robbing those citizens of the efficiency, simplicity, fairness, truth, and honest government that they deserve. It is a disgrace.

    1. Don’t forget the fees earned by the accountants and financial planners, also.

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        Ah yes, you devil lawyer Acbar, a Freudian omission, I guess, guilty as charged.

  8. Steve Haner Avatar
    Steve Haner

    And the lobbyists! Tax bills were my specialty!

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      I strongly suspected that possibility, but thought it best not to inquire, and to just instead plunge ahead, virtue signalling while holding my breath, leaving you a way out. So now we’ve all come clean!!!

  9. LarrytheG Avatar

    re: tax code complexity and the “swamp” and Steve Haners mucking in it!


    You know, Conservatives RAIL and BLATHER on and on about how bad government and government regulation is but how politicians have totally screwed up the tax code is much, much worse and all we hear is how they’re gonna “flatten” and “widen” the code by getting rid of the worse “carve-outs”.

    Yes, indeed… it’s a perennial claim from those who also never fail to mention that tax & spend is “immoral” !!!!

    Tax expenditures – tax breaks for things like employer-provided health insurance, 401Ks essentially shift taxes from those who benefit from these to those who do not or cannot. So the irony is all those folks who do not receive employer-provided health insurance and have to buy their own without tax subsidies ALSO end up paying higher taxes to cover the tax losses due to not taxing those who receive employer-provided.

    In that regard – increasing the Std Deduction while making taxes less complicated for the average guy – won’t improve things for those who do
    not get tax breaks outside of paying income taxes.

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