In Virginia, tax acquiescence has consistently been backward-looking, with anniversary affair acquiescent legislation to accommodate Virginia’s tax cipher with the federal Internal Acquirement Cipher (IRC) as it existed at the end of the antecedent tax year. These acquiescence updates happened like clockwork until 2018, aback legislators and Governor Ralph Northam (D) accommodated to the IRC as it existed on February 8, 2018, with one big exception: about the absoluteness of the accoutrement of the federal Tax Cuts and Jobs Act of 2017.
This agency that admitting the 2018 acquiescence date, abounding accoutrement of the new federal tax law accept yet to be congenital into Virginia’s own arrangement of taxation. Nevertheless, several consequential changes are transpiring akin after accompaniment action, while others are acceptable to booty aftereffect with aing year’s acquiescence update. It is important to recognize, therefore, that while tax ameliorate meant a tax cut for the all-inclusive majority of taxpayers at the federal level, the aftereffect runs in the adverse administration on Virginians’ accompaniment tax returns.
This abbreviate cardboard provides a abrupt overview of which accoutrement of the federal Tax Cuts and Jobs Act (TCJA) affect accompaniment tax accountability in Virginia and offers a few recommendations for how Virginia policymakers can respond, decidedly if they ambition to abstain an accidental access in tax revenues. As in abounding added states, federal tax ameliorate creates both an befalling and an catalyst for tax ameliorate in Virginia—an befalling because the new tax law provides the accompaniment with added acquirement which can be acclimated to pay bottomward reforms, and an catalyst because, as changes in the federal tax cipher animate added calm investment, policymakers may ambition to position the Commonwealth to best attempt for that investment.
Each accompaniment has its own access to taxation–its own accumulated of tax types, rates, and structures, and rules and exemptions–but akin the best freewheeling accompaniment tax structures draw aloft the federal tax code. This reality, consistently significant, has become far added pertinent with the accomplishing of the federal Tax Cuts and Jobs Act.
Some states accept ample swaths of the federal tax cipher by reference; others use it as a starting point, again boggle endlessly; and still others absorb federal accoutrement and definitions added sparingly. In some states, the federal tax cipher is mirrored; in others, echoed. The differences bulk greatly, but so do the credibility of agreement. Virginia takes an all-embracing approach, accumulation federal definitions into the accompaniment tax cipher unless a altered acceptation is acutely required, and adopting by advertence all accoutrement of the Internal Acquirement Cipher affecting accompaniment tax systems except those from which it especially decouples.
States accommodate to accoutrement of the federal tax cipher for a array of reasons, but abundantly to abate the acquiescence accountability of accompaniment taxation. Doing so allows accompaniment administrators and taxpayers akin to await on federal statutes, rulings, and interpretations, which are about added abundant and all-encompassing than what any alone accompaniment could produce.
It provides bendability of definitions for those filing in assorted states and reduces duplication of accomplishment in filing federal and accompaniment taxes. It permits abundant assurance on federal audits and enforcement, forth with federal aborigine data. It helps to abbreviate tax arbitrage and abate bifold taxation. For the filer, it can accomplish things easier by acceptance the filer to archetype curve anon from their federal tax forms. In the words of one scholar, federal acquiescence represents a case of “delegating up,” acceptance states to conserve legislative, administrative, and administrative assets while abbreviation aborigine acquiescence burdens.
Delegating up, of course, agency ceding a assertive bulk of control, appropriately the countless of means that states adapt or decouple from the Internal Acquirement Code. Best states, including Virginia, angle to see added acquirement due to federal tax reform, with expansions of the tax abject reflected in accompaniment tax systems while agnate bulk reductions abort to breeze down. The admeasurement to which this is accurate depends on how and aback states conform.
There are at atomic bristles ample categories of means that federal tax ameliorate can drive accompaniment acquirement changes, and technically alone one of them is accidental aloft an acclimatized acquiescence statute. In Virginia and best added states, however, the acquirement implications are decidedly beyond with a conformity. The bristles sources of acquirement changes are as follows:
Some tax changes are congenital by the state’s best of an assets starting point. Calculations of Virginia taxable assets activate with federal acclimatized gross income, the analogue of which has afflicted hardly beneath the new tax law. These modifications, including the basic aishment of the affective bulk deduction, are now allotment of Virginia’s tax arrangement akin admitting Virginia has not yet accommodated to the Tax Cuts and Jobs Act.
Virginia, like best states, follows federal analysis and definitions in abounding areas, from the ambit of the mortgage absorption answer to Area 179 baby business expensing and abounding things in between. While some states accommodate selectively, Virginia adopts best of these accoutrement automatically, with a few accoutrement from which it especially decouples (such as accelerated business depreciation, discussed later). Because Virginia begins with federal acclimatized gross assets rather than federal taxable income, moreover, the Commonwealth does not mirror the federal accepted answer or claimed exemption. These accoutrement will not change unless Virginia conforms to the new law.
Thirty-one states crave that taxpayers use identical filing statuses on their federal and accompaniment returns, meaning, for instance, that affiliated couples which accept to book accordingly for federal tax purposes could not account themselves of the advantage of affiliated filing alone on their accompaniment forms. Similarly, nine states and the District of Columbia crave the best to catalog or booty the accepted answer to backpack through from the federal to the accompaniment form. Back the optimal best at the federal akin may not additionally be optimal at the accompaniment level, mandating accord may aftereffect in college accompaniment tax payments.
In Virginia, which links both filing cachet and analysis choices to the decisions fabricated for federal filing purposes, added acquirement can be expected–even after a broader acquiescence update–because almost two-thirds of those who ahead itemized will now acquisition it advantageous to booty the added acceptable federal accepted deduction. These taxpayers will lose their itemized deductions in Virginia as well, akin admitting in abounding cases their accompaniment accountability will be college aback alive to the state’s $3,000 accepted answer ($6,000 for collective filers).
Some states absorb what is accepted as Subpart F assets into their tax base, which allows them to acquire a concise asset from the “deemed” repatriation accouterment in the new federal law. Virginia is not amid these states, so the aftereffect of changes to the analysis of all-embracing assets beneath the TCJA will be bashful for Virginia tax purposes. However, the Commonwealth does accommodate to the enactment of a new accord absolution arrangement for the taxation of adopted income, which should access Virginia collections somewhat.
The new law changes allurement structures and favors added investment. All states, behindhand of what they do about tax conformity, will acquire the allowances of bread-and-er amplification brought about by federal tax reform, admitting the bulk to which they participate in the added bread-and-er action depends on abounding factors, including the states’ own tax codes.
As Virginia assembly attack with the accompaniment tax cipher in the after-effects of federal tax reform, they should pay accurate absorption to assertive accoutrement which accept undergone a change due to the new federal law:
Virginia archive its own advance on both the accepted answer and claimed exemption—mostly. The Commonwealth’s claimed absolution is a $930 answer for “each claimed absolution acceptable to the aborigine for federal assets tax purposes.” This introduces a assertive bulk of ambiguity, because the new federal law functionally eliminates the claimed absolution by ambience its bulk at $0 but does not aish it outright. While taxpayers are clumsy to affirmation a now-worthless absolution on their new federal tax returns, technically they may still be acceptable for the exemption.
The Virginia conception of “allowable to the aborigine for federal assets tax purposes” allows for assorted accessible interpretations in this new environment. One can be acceptable for article after claiming it, but is the absolution acceptable if it cannot be claimed? Similarly, does “for federal assets tax purposes” beggarly article afterpiece to “for purposes of filing and remitting your federal assets tax” or “under the accoutrement of the Internal Acquirement Code”? At present, the Virginia Department of Taxation is operating beneath the acceptance that Virginia’s claimed absolution will accept to be accessible to taxpayers, but should assembly ambition to ensure its preservation, absolute this textual ambiguity would be advisable. If policymakers ambition the claimed absolution to accept available, they should alter the cipher to accomplish that clear.
Virginia follows the federal government in eliminating the affective bulk answer for all but aggressive cadre on alive assignment who move pursuant to a aggressive order. Because this is an above-the-line deduction, the change is in actual aftereffect in Virginia, accretion accompaniment revenues.
Virginia mirrors the new federal limitations on the mortgage absorption deduction, and aloft conformity, will alone acquiesce the answer to be taken for absorption on the aboriginal $750,000 in mortgage debt, bottomward from the aboriginal $1 million. This change additionally increases accompaniment revenues.
Federal tax ameliorate legislation retroactively broadcast accommodation for the medical bulk answer for tax year 2017, authoritative it accessible to taxpayers for whom medical costs exceeded 7.5 percent of acclimatized gross income, bottomward from a accepted alpha of 10 percent. This attendant acclimation would not accept been captured automatically, but was accurately adopted in Virginia’s 2018 acquiescence bill. This change reduces accompaniment revenues slightly.
Much has been fabricated of the new $10,000 cap on the accompaniment and bounded tax deduction, but beneath apprehension has been paid to its fractional assimilation into abounding accompaniment tax codes, including Virginia’s. While Virginia necessarily disallows the allocation of the answer provided for accompaniment assets tax payments–which would be recursive–it does acquiesce a answer for bounded acreage taxes, which would be accountable to a $10,000 cap beneath TCJA conformity. This change increases accompaniment revenues.
Under the new federal law, baby businesses can abstract a beyond allotment of their investments in the aboriginal year, with the cap accretion from $500,000 to $1 actor and phaseout of the account alpha at $2.5 million, up from $2 million. Virginia would accommodate to these changes, which advance the tax analysis of basic investment, authoritative this the attenuate acquiescence accouterment which reduces Virginia tax collections.
Corporate assets taxes are advised to abatement aloft net assets (essentially profits), but because business cycles do not neatly chase the calendar, accomplishing this requires businesses to be able to account assets in one year with losses from another. Virginia adopts the federal access to the analysis of net operating losses, which afflicted beneath tax reform. Previously, losses could be agitated advanced for 20 years and aback for two, with no caps on the bulk agitated advanced or backward. With conformity, losses could alone be agitated forward–not back–and for an absolute cardinal of years, admitting beneath the new system, carryforwards cannot abate tax accountability by added than 80 percent in any accustomed year. This change increases accompaniment revenues.
At the federal level, businesses accept the account of abounding and actual expensing of investments in accouterment and equipment, but in return, accept beneath acceptable analysis of their net absorption expenses. This accommodation break bottomward in Virginia, which especially decouples from accelerated abrasion regimes like abounding expensing, but would accommodate to the new absorption bulk limitations, which bind deductions for business interest. This change increases accompaniment revenues.
The Area 199 calm assembly activities deduction, which was abundantly a accomplishment answer but additionally had appliance to businesses affianced in construction, engineering, and agronomical processing, amid added activities, has been alone at the federal akin and, already Virginia conforms to the TCJA, will abandon at the accompaniment akin as well, accretion accompaniment revenues.
The assets accustomed answer has been bargain in value, with new accoutrement for foreign-source income. Virginia will absorb these federal changes, accretion accompaniment acquirement slightly.
Virginia follows the federal government’s advance in eliminating like-kind exchanges for claimed property, addition accouterment ameliorated by the action of abounding expensing of accouterment and accessories purchases at the federal level, but not account in Virginia.
Virginia assembly accept a ambit of options accessible to them in the deathwatch of federal tax reform. They can do annihilation and acquire added revenue; they can seek to about-face assertive changes to authority taxpayers harmless; or they can analyze bulk cuts or tax reforms advised to advance the Commonwealth’s tax competitiveness while alienated an unlegislated tax increase.
Many of the accoutrement which access accumulated tax accountability in Virginia represent the aishment of targeted tax preferences, authoritative the apology of the old cachet quo undesirable. Instead, Virginia policymakers adulatory to abstain a net tax access should use the new acquirement to pay bottomward added allusive reforms.
They might, for instance, advance the state’s analysis of basic investments, back abounding expensing is one of the added pro-growth elements of federal tax ameliorate and represents the able analysis of basic expenditures. They could opt for bashful bulk reductions or the alliance of accompaniment assets tax brackets. They could annihilate the state’s alliance amends beneath which collective filers pay added than they would if they filed separately, and which is partially, but not completely, addressed by a Spouse Tax Acclimation credit. Simply acceleration the state’s assets tax brackets for affiliated filers, as done in best added states, would go a continued way to simplifying what amounts to a complicated band-aid put in abode years ago.
To the admeasurement that accompaniment acquirement agencies are ambiguous about the accompaniment acquirement furnishings of federal tax reform, reforms could be implemented or phased in on a revenue-contingent base application tax triggers, ensuring acquirement capability and alone implementing reforms for which added acquirement is available.
Inaction after-effects in college taxes, and in means which do not necessarily accept by the preferences of policymakers akin if they were to advance revenue-raisers intentionally. Federal tax ameliorate lowers federal tax burdens for best taxpayers. It additionally gives Virginia assembly an befalling to advance the Commonwealth’s tax competitiveness—but alone if they act.
 Va. Gen. Assem., House Bill 154 and Senate Bill 230, 2018 Reg. Sess.
 This area has been acclimatized from a best cardboard on tax conformity. See Jared Walczak, “Tax Ameliorate Moves to the States: Accompaniment Acquirement Implications and Ameliorate Opportunities Following Federal Tax Reform,” Tax Foundation, Jan. 31, 2018, https://taxfoundation.org/state-conformity-federal-tax-reform/.
 VA Cipher § 58.1-301.
 Kirk J. Stark, “The Federal Role in Accompaniment Tax Reform,” Virginia Tax Review 30 (December 2010), 423, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1718606.
 Ruth Mason, “Delegating Up: Accompaniment Acquiescence with the Federal Tax Base,” Battle Law Journal 62:7 (April 2013), https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3382&context=dlj.
 VA Cipher § 58.1-322.
 VA Cipher § 58.1-322.03.
 KPMG, “Tax Ameliorate – KPMG Report on New Tax Law: Analysis and Observations,” Feb. 6, 2018, 108-109, https://home.kpmg.com/content/dam/kpmg/us/pdf/2018/02/tnf-new-law-book-feb6-2018.pdf.
 Tax Foundation, “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Dec. 18, 2017, https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/.
 VA Cipher § 58.1-322.03.
 This action best was apprenticed by the constraints of operating beneath account adaptation procedures; similarly, the alone authorization amends was set at $0 rather than actuality alone outright, which would accept exceeded what can be able in a adaptation bill.
 Va. Gen. Assem., House Bill 154 and Senate Bill 230, 2018 Reg. Sess.
 Jared Walczak, Joseph Bishop-Henchman, and Nicole Kaeding, “Details of the Conference Report for the Tax Cuts and Jobs Act,” Tax Foundation, Dec. 15, 2017, https://taxfoundation.org/conference-report-tax-cuts-and-jobs-act/.
 Stephen J. Entin, “Conference Report Limits on Absorption Deductions,” Tax Foundation, Dec. 17, 2017, https://taxfoundation.org/conference-report-limits-interest-deductions/.
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