Virginia’s tax approach will cost middle class
In a few months, millions of Americans will grudgingly face the annual obligation to file both federal and state income taxes. The new federal tax reform act passed by Congress makes some significant changes to income tax brackets, allowable deductions, and adjustments to income.
Most notable among the many changes is the significant increase in the so-called standard deduction. For example, a married couple filing a joint return (combined incomes) will be allowed a $24,000 standard deduction compared to $12,700 in 2017. The upshot of the higher standard deduction will mean that many people will opt for this rather than itemizing deductions (e.g., mortgage interest, charitable contributions, medical expenses, etc.).
Virginia’s tax code does not permit taxpayers to itemize deductions on their state return if they use the standard deduction on their federal taxes. If they use the standard deduction on the federal return, they must also use the state’s standard deduction. This has not been a huge issue in the past but will become a significant issue for 2018 taxes.
Virginia’s standard deduction for a married couple filing jointly is $6,000. This creates a big dilemma in choosing whether to itemize or use the standard deduction on the federal return. The difference of $18,000 in the standard deduction for a married couple filing jointly means that some will opt to itemize on the federal return even though it may be less than the standard deduction. Making the wrong choice can be costly for taxpayers.
How do we resolve this dilemma? The most obvious fix is for Virginia’s General Assembly to allow Virginians to choose whether to use itemized deductions or the standard deduction irrespective of what they use on their federal return. Let’s hope that Virginia’s lawmakers will approve this change early in the 2019 session.