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Virginia Department of Taxation

Virginia Department of Taxation. What isn’t new for 2005?. What’s going on in Virginia?. Major Tax Reform bill passed by 2004 Special Session of the Virginia General Assembly

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Virginia Department of Taxation

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  1. VirginiaDepartment of Taxation What isn’t new for 2005?

  2. What’s going on in Virginia? • Major Tax Reform bill passed by 2004 Special Session of the Virginia General Assembly • Major Project to replace agency’s host accounting system well underway & nearing completion with implementation now planned for summer 2005

  3. Fixed Date Conformity • Virginia conforms to the IRC as of December 31, 2003, with exceptions for bonus depreciation and NOL – must adjust Virginia income tax returns using addition and subtraction fields provided on returns • Federal tax bill could be passed late in year, after Virginia has gone to print with forms and instructions • We are watching pending federal legislation and will post supplemental instructions on our web site, if necessary – any changes to Virginia returns that become necessary will be reported using existing FDC addition and subtraction fields – we are allowing for “other FDC” adjustments and will make note in our instructions to watch for release of supplemental instructions (Update – changes are occurring on the federal side that will result in the release of supplemental instructions in the near future. Watch our web site: http://www.tax.virginia.gov)

  4. What’s new in Virginia? Individual Income Tax – Legislative Changes • Taxable Year 2004 • Age Deduction Changes – includes phase-out of $6,000 Under Age 65 age deduction and, for the Age 65 and Older age deduction, “grand-fathering”and “income-testing” • 4 New “Refund Only” contributions • Contribution “limits” • Expansion of services eligible to qualify for Neighborhood Assistance Act Credit • Electronic filing or 2D barcode Tax Practitioner mandate • Agricultural Products Donation subtraction, Code 27: Expired

  5. What’s new in Virginia? IndividualIncome Tax – Legislative Changes • Taxable Year 2005 • Standard deduction for married taxpayers increases - $5,000 increases to $6,000 for married filing jointly and $3,000 for married filing separately • Filing thresholds increase - $5K/$8K increases to $7K/$14K • Personal exemptions for taxpayers and dependents increases to $900 – the age 65 and over and the blind exemptions remain at $800 each • The Taxable Year 2005 changes impact: • Employer withholding beginning January 1, 2005 • Individual estimated payments for 2005 • Annual return filing for ty2005, which begins January 1, 2006

  6. What’s new in Virginia? Individual Income Tax – Legislative Changes Taxable Year 2006 New nonrefundable credit equal to 20% of federal EITC – taxpayers may claim this credit OR the Low Income Credit, not both

  7. What’s new in Virginia? Individual Income Tax – Age Deduction Changes The Phase-out Under Age 65 Age Deduction • For taxable year 2004, taxpayers who have obtained age 63 or 64 as of January 1, 2005, may claim a $6,000 Under Age 65 age deduction: • For taxable year 2004, age 62 not eligible for Under Age 65 age deduction as phase-out begins • Taxpayer must be 63 or 64 as of January 1, 2005, to claim the Under Age 65 age deduction on the ty2004 return FOR TY 2004: Taxpayers born on or between January 2, 1940, and January 1, 1942, will have obtained age 63 or 64 as of January 1, 2005, and thus may claim the $6,000 under age 65 age deduction.

  8. What’s new in Virginia? Individual Income Tax – Age Deduction Changes The Phase-out Under Age 65 Age Deduction • For taxable year 2005, taxpayers who have obtained age 64 as of January 1, 2006, may claim a $6,000 Under Age 65 age deduction • For taxable year 2005, age 63 not eligible for Under Age 65 age deduction, as phase-out continues • Taxpayers must be age 64 as of January 1, 2006, to claim the Under Age 65 age deduction on the ty2005 return FOR TY 2005: Taxpayers born on or between January 2, 1941, and January 1, 1942, will have obtained age 64 as of January 1, 2006, and thus may claim the $6,000 under age 65 age deduction.

  9. What’s new in Virginia? Individual Income Tax – The Age Deduction The Phase-out Under Age 65 Age Deduction • For taxable year 2006, the Under Age 65 $6,000 age deduction is eliminated and the phase-out is completed • For taxable year 2006, only taxpayers who have obtained age 65 and older by January 1, 2007, will be eligible for an Age 65 and Older age deduction

  10. What’s new in Virginia? Individual Income Tax – The Age Deduction “Grandfathered” Taxpayers The Age 65 and Older Age Deduction • Taxpayers born on or before January 1, 1939, may claim a $12,000 age deduction for taxable year 2004 and all future taxable years • In short, if a taxpayer is born on or before January 1, 1939, then that taxpayer is grandfathered and can claim the full $12,000 age deduction without regard to income

  11. What’s new in Virginia? Individual Income Tax – The Age Deduction The Age 65 and Older Income Based Age Deduction • Taxpayers born on or after January 2, 1939, who obtain age 65 during the taxable year, may qualify for an income based age deduction • For single filers, the income based age deduction is reduced $1 for every $1 that AFAGI exceeds $50,000 • For married filers, whether filing jointly or separately, the income based age deduction is be reduced $1 for every $1 AFAGI exceeds $75,000

  12. What’s new in Virginia? Individual Income Tax – The Age Deduction What’s the AFAGI? AFAGI = Federal Adjusted Gross Income (FAGI) modified for fixed date conformity adjustments minus taxable Social Security Act and Tier One Railroad Retirement Act Benefits. For Married Filers, whether filing jointly or separately, the AFAGI is calculated using both spouse’s FAGI, FDC adjustments, and taxable SSA & Tier One Railroad Retirement benefits. AND For Married Filers, whether filing jointly or separately, if both spouses are eligible and both are claiming the income based age deduction, the married taxpayers must compute a joint income based age deduction first and then split the joint income based age deduction between each spouse. No exceptions

  13. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 1 A “Filing Status Single” taxpayer born on April 15, 1939, with a ty2004 AFAGI of $55,000, may claim an income based age deduction of $7,000: AFAGI = $55,000 Threshold = (minus) $50,000 Difference = $5,000 Maximum age deduction = $12,000 Amount AFAGI exceeds threshold = (minus) $5,000 Age Deduction allowed = $7,000

  14. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 2 Married taxpayers filing a joint Virginia return and one taxpayer is claiming the income based age deduction and the other is claiming the Under Age 65 age deduction for ty2004. With a joint AFAGI of $80,000, the age 65 taxpayer may claim an income based age deduction of $7,000: Joint AFAGI = $80,000 Threshold = (minus) $75,000 Difference = $5,000 Maximum age deduction = $12,000 Amount AFAGI exceeds threshold = (minus) $5,000 Age Deduction allowed = $,7000 Note – the Under Age 65 age deduction does not impact the computation of the income based age deduction for one spouse (a grandfathered Age 65 and Older age deduction would not impact the computation either).

  15. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 3 Married taxpayers with a joint AFAGI of $80,000. Taxpayers are filing separately, as one spouse is a Virginia resident and the other is a nonresident with no Virginia source income and thus will not be filing a VA return. Each spouse meets the age requirement to claim an Age 65 and Older income based age deduction, but only one taxpayer is actually filing a Virginia return and claiming the age deduction. With a joint AFAGI of $80,000, the taxpayer filing separately in Virginia may claim an income based age deduction of $7,000: Joint AFAGI = $80,000 Threshold = minus) $75,000 Difference = $5,000 Maximum age deduction = $12,000 Amount AFAGI exceeds threshold = (minus) $5,000 Age Deduction allowed = $,7000

  16. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 4 Married taxpayers with a joint AFAGI of $80,000. Taxpayers are filing jointly and both are eligible for an Age 65 and Older income based age deduction. With a joint AFAGI of $80,000, the joint age deduction is $19,000, with each spouse’s age deduction equal to $9,500 Joint AFAGI = $80,000 Threshold = (minus) $75,000 Difference = $5,000 Maximum joint age deduction = $24,000 Amount AFAGI exceeds threshold = (minus) $5,000 Joint Age Deduction allowed = $19,000 Each spouse claims 50% = (divide by 2) $9,500 Note: The $1 reduction for every $1 the AFAGI exceeds the threshold occurs once, whether one or both spouses are claiming an income based age deduction.

  17. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 5 Married taxpayers with a joint AFAGI of $92,000. Both taxpayers are filing separately in VA and both are eligible for and are claiming an Age 65 and Older income based age deduction. With a joint AFAGI of $92,000, the joint age deduction is $7,000, with each spouse’s age deduction equal to $3,500 Joint AFAGI = $92,000 Threshold = (minus) $75,000 Difference = $17,000 Maximum joint age deduction = $24,000 Amount AFAGI exceeds threshold = (minus) $17,000 Joint Age Deduction allowed = $ 7,000 Each spouse claims 50% = (divide by 2) $3,500

  18. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 6 Married taxpayers with a joint AFAGI of $92,000. Both taxpayers meet the age requirement for an Age 65 and Older income based age deduction. However, one taxpayer is a VA resident filing separately and the other is a non resident with no VA source income (and thus will not be filing a VA return). With a joint AFAGI of $92,000, the taxpayer filing separately does not qualify for an Age 65 and Older income based age deduction. Joint AFAGI = $92,000 Threshold = (minus) $75,000 Difference = $17,000 Maximum age deduction = $12,000 Amount AFAGI exceeds threshold = (minus) $17,000 Age Deduction allowed = $ 0.00 Note – even though both spouses meet the age requirement for the Age 65 and Older age deduction, only one spouse is actually filing a return in VA. Thus, the maximum age deduction from which the reduction occurs is $12,000, not $24,000 (see example 5).

  19. What’s new in Virginia? Individual Income Tax – The Age Deduction Example 7 Married taxpayers with a joint AFAGI of $92,000. Taxpayers are filing a joint VA return and both taxpayers meet the age requirement for an Age 65 and Older income based age deduction . However, one spouse is claiming a disability subtraction of $20,000 and thus cannot claim the age deduction. With a joint AFAGI of $92,000, the spouse eligible to claim an Age 65 and Older income based age deduction does not qualify for an age deduction. Joint AFAGI = $92,000 Threshold = (minus) $75,000 Difference = $17,000 Maximum age deduction = $12,000 Amount AFAGI exceeds threshold = (minus) $17,000 Age Deduction allowed = $ 0.00 Note – even though both spouses meet the age requirement for the Age 65 and Older age deduction, only one spouse is actually eligible to claim the age deduction. As a result, the eligible spouse does not qualify for an income based age deduction.

  20. What’s new in Virginia? The Age 65 and Older Income Based Age Deduction Critical Points • For married taxpayers, the joint AFAGI must always be used to calculate the age deduction – it does not matter if only one spouse is claiming the Age 65 and Older income based age deduction, or whether the taxpayers filed separate federal returns or separate Virginia returns, don’t live together, or are not both Virginia residents. If the taxpayer is married, then use the joint AFAGI. • For married taxpayers, whether filing jointly or separately, when both spouses are claiming the Age 65 and Older income based age deduction, the calculation is performed using a maximum allowable age deduction of $24,000 – that is, with a $75,000 threshold, the age deduction phases-out at $99,000. For the income based age deduction to phase-out at $99,000, both spouses must actually be filing a VA return and claiming the income based age deduction. • The examples provided demonstrate the calculation of a “gross” income based age deduction. For part-year and nonresident returns, the gross age deduction would be reduced accordingly i.e., using the part-year ratio or adjusted by the nonresident allocation percentage.

  21. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements If a paid tax preparer: • Prepared 200+ TY2003 Virginia individual income tax returns, then that tax preparer is required to file TY2004 individual income tax returns and all future taxable year individual income tax returns using electronic medium or using software with 2D barcode technology • Prepares 100+ Virginia individual income tax returns in any taxable year beginning with TY2004, then that tax preparer is required to file individual income tax returns using electronic medium or using software with 2D barcode technology the following taxable year and thereafter

  22. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements Who is a “Tax Preparer”? A tax preparer is defined as a person who prepares, or who employs one or more individuals to prepare, an income tax return for compensation. For purposes of this requirement, a tax preparer does not include volunteers who prepare tax returns for the elderly or poor as part of a nonprofit organization's program.

  23. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements What electronic mediums are available for filing individual income tax returns? • E-file:Most current year 760, 760PY, and 763 returns can be submitted via e-file, a joint federal and state electronic filing program, which is accessed using commercial tax preparation software • I-File:Most current and prior year 760s (from ty2000 forward) can be submitted via I-File, a web-based filing channel developed and maintained by Virginia TAX

  24. E-file – A fast, secure, and accurate channel! • E-file is a joint federal and state program that allows tax professionals and taxpayers to submit both federal and state returns to the IRS electronically using commercial tax preparation software (also referred to as ELF or JELF). • VA TAX receives the returns by accessing a secure IRS site and downloading the Virginia returns daily • For each e-filed return, Virginia either accepts or rejects the return and then sends an acknowledgement to the tax professional – so the filer knows within 2 to 3 days if Virginia has accepted or rejected the return! (And, if we reject the return, we provide the filer with a reason code so the filer can fix the return and and resubmit!) • E-filed returns have a 2.83% error rate compared to a 10.47% error rate for paper returns. And, the errors for e-filed returns are usually simple errors that can be quickly resolved without any taxpayer contact! • Refunds are issued fast – no mail delays, no manual processing at TAX to capture the return information – the return is transferred right from the preparer’s computer into ours!

  25. For taxable year 2004, e-file will include DIRECT DEBIT for Virginia returns with a tax due!

  26. What can be filed using e-file? • 760 Returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State • Exception: may file using e-file if only credit claimed from the Schedule CR is the Political Contribution Credit • 760PY returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State • 763 returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State Virginia also accepts “state only” returns – however, not all software supports this functionality.

  27. What cannot be filed using e-file • Amended Returns • Prior Year Returns – use ifile • Fiduciary Returns • Extension Requests – use ifile • Returns with certain other subtractions that require documentation • Returns with Federal Forms 4852, Substitute W2s • Returns for deceased taxpayers – including joint returns with one deceased taxpayer • Fiscal Year Returns • Returns with Schedule CR credits claimed (except for 760s when the only Schedule CR credit claimed is the Political Contribution Credit) • Returns with Credit for Taxes Paid for Another State

  28. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements What is a 2D barcode and does my software have 2D? • For taxable year 2004, the following software companies have indicated that their software will provide 2D barcodes: • CCH, Inc • Creative Solutions • Drake Enterprises • H & R Block • Intuit ProSeries • Lacerte Software • RIA • STF Service Corp • TaxWise

  29. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements What is a 2D Barcode? The 2D Barcode

  30. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements Legislation includes: • An Opt Out Provision for Taxpayers • A Hardship Waiver for the Tax Preparer

  31. What’s new in Virginia? “Paid Tax Preparer” Electronic Medium and 2D Barcode Filing Requirements • Materials describing the legislation along with FAQs are posted on our web site in the Tax Professional Section / Important News and Updates • The Taxpayer Opt Out Form and the Tax Preparer Hardship Waiver Request form have also been posted • Materials and forms were emailed to NACTP and our Tax Professional email group week of 8/20/04

  32. As a paid tax preparer, which channel should you use?

  33. What’s new in Virginia? Individual Income Tax – Form Changes • Age deduction changes have no form impacts – affects programming only – except that a field for the AFAGI used to compute an income based age deduction has been added along with birth date fields. • New Contributions and Public School Foundations have no form impacts, as we use the the “code box” method with the Schedule ADJ • Schedule NPY has been converted to code boxes for contributions

  34. What’s new in Virginia? Individual Income Tax – Form Changes • Paid Tax Preparer legislation requires capture of a tax preparer “FEIN/PTIN/SSN” field and a new “Filing Election” field. These changes drove a redesign of page 2 of the 760CG – we established a “Paid Tax Preparer” Section. • Added instructional text to the 760PMT • For Schedule CR, have expanded line 30 to clarify when and for what reasons taxpayers may claim a credit for “Clean Fuel”

  35. What’s new in Virginia? • What’s the 760PMT? • The 760PMT is the voucher taxpayers who e-file a tax due return should always use to submit payment by check to VATAX • The 760PMT should never be used by taxpayers submitting a paper return! • Taxpayers who e-file a tax due return should never submit payment with a copy of the return • The 760PMT should always have the primary’s SSN printed in the “Your SSN” field, regardless of which taxpayer on a joint return writes the check! • The 760PMT should always be mailed to directly to VATAX at PO Box 1478 – not to the Locality • New for 2004: Use Direct Debit for E-Filed Tax Due Returns

  36. What’s new in Virginia? • Important Contact and Resource Information • TAX’s web site is located at www.tax.virginia.gov • To receive the latest breaking tax news, sign up for the Tax Professional email group – just click on the “General Information Section and sign-up! • The Tax Professional Hot Line is 804-367-9286

  37. VA TAX Web SiteWe’d Love to have you visit us! Click here

  38. The Tax Professional Page Click here to sign up for the Tax Professional email group

  39. Pass-Through Entities Effective Taxable Year 2004 New Reporting Requirements for Pass-Through-Entities

  40. Pass-Through Entities • Legislation creates a uniform filing requirement for Pass-Through-Entities • Requirement applies all Partnerships including S-Corporations, General and Limited Partnerships, and Limited Liability Partnerships and Companies • Form 500S is being discontinued, effective for TY2004

  41. Pass-Through Entities New Forms and Schedules: • Form 502 PTE Return, Schedule 502A for Allocation and Apportionment, and Schedule VK-1, to report each Owner’s Share of Income and Virginia Modifications and Credits • Form 765 Unified Nonresident Individual Income Tax Return – optional. Includes a Form 765, a Summary Schedule VK-1 and a Schedule of Participants

  42. Pass-Through-Entities Form 502 Penalties: • Due 15th day of 4th month following close of taxable year • Late filing - $200 per month; maximum 6 months • Failure to file in excess of 6 months = 6% of Virginia taxable income, reduced by the late filing penalty and any tax paid by the owners on their respective shares of income

  43. Corporate Income Tax • New Schedule 500AB for “Add Back” • Requires add back of certain intangible expenses i.e., “DHC” legislation

  44. Other Tobacco Products • New Tax effective March 1, 2005 • 10% tax on the sale price charged by wholesaler for each package of tobacco product sold to a retail dealer or institutional, commercial, or industrial user. • 10% tax on the purchase price paid by the retail dealer for each package of tobacco product purchased from a wholesale dealer located outside of the Commonwealth.

  45. Other Tobacco Products • All returns due by 10th of following month i.e., all taxpayers liable for tax will be required to remit return with payment monthly, with first return due April 10th, 2005 • Mailer to be sent out in early December – will include a tear off registration form for businesses liable for the new OTP tax to complete and mail back to VA TAX • Returns will be mailed to registered businesses in February 2005

  46. Sales & Use Tax 2004

  47. Sales & Use Tax 2004 Effective July 1, 2004: • Telephone calling cards now subject to sales and use tax on July 1, for initial purchases only. • HB 1463 codifies Virginia’s longstanding policy with respect to nexus for imposing sales and use tax requirements on dealers.

  48. Sales & Use Tax 2004 Effective September 1, 2004: • The state sales and use tax rate on sales of non-food items increased from 3.5% to 4%. • Combined state and local tax rate is now 5%. • Combined rate for vending machine tax is now be 6%

  49. Sales & Use Tax 2004 New Dealer’s Discount Rates - General: For sales of $0 to $62,500 .0300 $62, 501 to $208,000 .0225 $208,001 + .0150

  50. Sales & Use Tax 2004 New Dealer’s Discount Rates - Vending Machine: For sales of $0 to $62,500 .0320 $62, 501 to $208,000 .0240 $208,001 + .0160

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