VirginiaDepartment of Taxation What isn’t new for 2005?
Agenda • Introductions • Overview of 2004 - Gerald Gwaltney, Deputy Commissioner • Return Processing – Howard Overbey, Processing Manager • Legislative & Form Changes for 2004 – Lee Mikelson, Channel Services Manager • Customer Services - Pam Inge, Senior Management Analyst
Overview of 2004 Virginia Capital – June 2004
Overview of 2004 • Legislation: Several significant bills passed by the 2004 Virginia General Assembly, including a Major Tax Reform bill. • IRMS: Replacement of agency’s host accounting system now scheduled for scheduled for August 2005 • Filing Season 2004: A successful filing season.
2004 Key Legislation • HB5018, a comprehensive tax reform bill passed during a special session of the 2004 Virginia General Assembly, which includes: • Changes to both individual and corporate income taxes; • An increase in the sales and use general state tax rate and the vending sales tax rate along with scheduled decreases in the food tax rate; • Increases in the cigarette excise tax; • New reporting requirements for Pass-through Entities, including S Corporations; and • A new tax, the Tobacco Products tax
2004 Key Legislation • SB526, which advanced Virginia’s date of conformity with the Internal Revenue Code (IRC) to 12/31/03: • Includes exceptions for the 30% and 50% special bonus depreciation and the 5-year Net Operating Loss (NOL) carryback provisions • With extensive federal legislation passed in 2004, agency is presented with challenges and timing issues
2004 Key Legislation • HB1159, requires certain Paid Tax Preparers to file individual returns using either electronic means or, if filing on paper, software that includes 2D barcode technology • Virginia joins several other states that have established return filing mandates for certain paid tax preparers • Trend is expected to continue, as more states announce adoption of filing mandates for paid tax preparers • For Virginia, our focus will be to work with the paid tax preparer community to promote voluntary compliance
IRMS Update • Implementation of the agency’s new host accounting system rescheduled for August 2005 • Issues with converting millions of records from current host to new host (IRMS) key reason for delay • IRMS now being updated with legislative changes • Testing of IRMS and new procedures now being actively tested
Filing Season 2004Results • Electronic filing growth continued • Refunds issued fast, faster, fastest…. • Error rate continues downward trend
Refund Turnaround Current Year Refunds, All Tax Types As of November 13, 2004
Error Rates As of November 5, 2004 Rate Inventory Filing Season 2001 22.36% 238,099 Filing Season 2002 10.76% 37,848 Filing Season 2003 10.13% 33,509 Filing Season 2004 9.77% 16,157
Individual Error RatesElectronic vs Paper Filed ReturnsAll Years & All Types • Electronic Returns 2.98% • Paper Filed Returns 13.61% • Overall Error Rate 9.77% As of November 15, 2004
Most Common Errors • Estimated, Extension & Other Payments – amounts claimed do not equal TAX Records • Tax Roll Problems – Names, SSNs, and birth dates do not match tax roll • Deductions and Subtractions errors
Results With lower error rates and refunds being issued faster than ever, the payment of refund interest has dropped significantly: For calendar years: Interest Paid 2004 (Nov 30) $3,039,126 2003 $4,188,807 2002 $6,404,312 WOW
Looking Forward to 2005 VA TAX faces many challenges in 2005 Implementing IRMS and the legislation passed by the 2004 Virginia General Assembly is a “BIG JOB” When we work together, no job is too big….we can meet the challenges and continue to provide the citizens of Virginia with top quality customer services
Looking Forward to 2005 And we’re not the only ones with a big job! Virginia Capital – November 2004
What happens when you mail in a paper return? • First, the envelope must be opened and then the return is extracted and sorted by form type, bottom line (refunds vs tax dues) and by taxable year e.g., 760CGs, 760 Handprint, 760PYs, and 763s etc. • After the returns are opened and sorted, they are placed in batches of 50, for easy handling • For tax due returns with checks, the return batches are routed to a special work unit that prepares the checks for processing • After opening, sorting, and batching, the returns are screened
What is return screening? • Each batch of returns is reviewed by a “Screener” • The screener views each return, looking to see if all required forms and attachments are present • If a return is missing forms and/or attachments, codes are placed on the return e.g. if a taxpayer claims a credit for taxes paid to another state but fails to submit the other state’s return, a code is placed on the return indicating that the other state’s return is missing • After screening, the returns are prepared for Data Capture, which can occur using either automated screening equipment or manual data entry, and then delivered to the Data Capture work unit
What can go wrong? • Human Error: VA TAX has handled over 2.3 million paper individual income tax returns this year – and with that volume, there’s always human error! We work diligently to minimize human error – the staff is trained and cross-trained and work product is continually reviewed by supervisors and team leaders. • Taxpayer Error: VA TAX regularly receives returns with missing documentation. In some cases, we even receive returns with no names and no SSNs! In addition, we frequently receive checks in the mail with no payment vouchers and no indication of what the check is even for – we research over 16,000 checks each month trying to determine why the payments were submitted!
How can you help? • Before letting your client leave your office, make sure the client understands what to mail, where to mail it, and when it has to be mailed! • Taxpayers may leave your office with complete returns, but when they get home, they may take the return apart and then put it all back together – and the package you gave your client, is not the same package we receive! • Check out your software – read the materials available on VA TAX’s web site and make sure your software is generating forms, vouchers, and other documents correctly. The more you know, the easier it will be for you to spot problems and avoid return processing delays.
Vouchers – An Example • All payment vouchers include a “scanline” • The scanline includes the taxpayer’s SSN, a form code identifying what the payment is for, a period or due date, and, in some cases, the taxpayer’s locality code • If the wrong voucher is used or the information in the scanline is incorrect, a taxpayer’s payment will most likely be misapplied – e.g., if a taxpayer uses the Form 760ES to submit a tax due payment, we’ll process that payment as an estimated payment and the next thing you know, the taxpayer is getting a bill! • Your software should be programmed to generate the correct information in the scanline – but sometimes software is programmed incorrectly!
To learn about Vouchers: • Go to www.tax.virginia.gov • View the voucher specifications located on the tax professional page – password is VA_TAX • Your software should create vouchers based on these specifications • VA TAX tests each software company’s vouchers – but sometimes the software companies make changes and don’t retest. • One software company created estimated payment vouchers with bad period dates in the scanline, and all those payments were applied as late! • One software company created 760PMTs with the wrong taxable year – its was 2003, and their tax due vouchers said 2000! Vendor specifications for returns and schedules are also located on the tax professional page! Check it out…………
What about those 2D barcodes? • 2D barcode returns: • If you change information on a return with a 2D barcode, always change the information using your software and reprint the return! • Educate your client. If they take home the return you prepared and it has a 2D barcode, they should never white out information and type in new information – if they can’t bring the return back to you, then they should line through the incorrect information and write in the new information. That way we can see that the return has been altered and we won’t use the 2D barcode.
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 was passed late in year, after Virginia had gone to print with forms and instructions • We will post supplemental instructions on our web site – any changes to Virginia returns that required because of this new federal legislation will be reported using existing FDC addition and subtraction fields • Are instruction booklets advise taxpayers and tax professionals to watch our web site for release of supplemental instructions www.tax.virginia.gov
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 and 8 new Public School Foundation 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
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
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
Individual Income Tax Age Deduction – 3 Parts • Phase-out of the Under Age 65 age deduction; • “Grandfathered” taxpayers; and • The new income-based age deduction.
Individual Income Tax The Phase-Out For taxable year 2004, only taxpayers born on or between January 2, 1940, and January 1, 1942, may claim the $6,000 under age 65 age deduction. • Taxpayers must be 63 or 64 as of January 1, 2005, to claim the Under Age 65 age deduction on the TY2004 return • Age 62 not eligible for Under Age 65 age deduction as phase-out begins
Individual Income Tax The Phase-out For taxable year 2005, only taxpayers born on or between January 2, 1941, and January 1, 1942, may claim the $6,000 under age 65 age deduction. • Taxpayers must be age 64 as of January 1, 2006, to claim the Under Age 65 age deduction on the TY2005 return • Age 62 and 63 not eligible for Under Age 65 age deduction, as phase-out continues
Individual Income Tax The Phase-out • 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 attained age 65 and older by January 1, 2007, will be eligible for an Age 65 and Older age deduction
Individual Income Tax Grandfathered Taxpayers • 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 may claim the full $12,000 age deduction without regard to income Key Date: January 1, 1939
Individual Income Tax The income based Age Deduction • Taxpayers born on or after January 2, 1939, who attain age 65 during the current taxable year, may qualify for an income based age deduction. • For single filers, the income based age deduction is computed by reducing the $12,000 maximum age deduction $1 for every $1 that AFAGI exceeds $50,000. • For married filers, whether filing jointly or separately, the income based age deduction is computed by reducing the $12,000 maximum age deduction $1 for every $1 that AFAGI exceeds $75,000.
Individual Income Tax 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.
Individual Income Tax What’s the AFAGI? For Married Filers, whether filing jointly or separately, the AFAGI is calculated using both spouses’ 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
Individual Income Tax Income based 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
Individual Income Tax Income based Age Deduction Example 2 Married taxpayers filing a joint Virginia return. One taxpayer is claiming the income based age deduction and the other is claiming the Under Age 65 age deduction for TY2004. 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 (a grandfathered Age 65 and Older age deduction would not impact the computation either).
Individual Income Tax Income based Age Deduction Example 3 Married taxpayers with a joint AFAGI of $80,000. Taxpayers are filing separately. One spouse is a Virginia resident. 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. 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
Individual Income Tax Income based 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. 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.
Individual Income Tax Income based 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. 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
Individual Income Tax Income based 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 nonresident with no VA source income (and thus will not be filing a VA return). 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).