Income Taxes in Virginia
With a maximum tax rate of 5.75% on income above $17,000, Virginia income tax rates are generally among the lowest in the region, and an attractive choice for high income taxpayers relocating from Washington, D.C. Though much of the income tax savings is offset by the personal property tax on cars and higher property tax rates on real estate. Virginia income taxes are generally straight forward, though there are some adjustments to help reduce taxes. For business owners, Virginia does allow pass-through taxation for S Corporations, unlike the District. Virginia has an aggressive Collections Division and there are a few things you should know if you owe a balance on your return.
Starting with the federal adjusted gross income (AGI), Virginia makes certain adjustments to arrive at your state AGI. Some notable deductions include investment income on U.S. obligations, military income of up to $15,000 and childcare expenses. If you claimed the standard deduction on your federal return, you must claim the standard deduction of $4,500 for Virginia. However, if you itemize, you are allowed all deductions for Virginia and taxpayers may claim a deduction for the actual amount of property taxes imposed by Virginia or any other taxing jurisdiction not otherwise deducted solely on account of the $10,000 annual limitation. Two-income couples filing a joint return will not pay more tax than the combined tax that would be due if separate returns were filed. Married couples filing jointly on Form 760 may reduce their tax by up to $259 if each spouse received income during the taxable year.
Domicile vs. Residency:
You are domiciled in Arlington, VA if this is your permanent legal residence meaning this is the place you intend to be, even if you do not live here currently. Domicile indicators include drivers license, voting, car registration, real property ownership, business pursuits and social ties. You may also be a Resident of Arlington if you maintain a place of abode here and spend more than 183 days in Virginia, even though you are domiciled somewhere else (special rules exist for Military service members and their spouses). You may be considered a part-year resident if you either moved into or out of Arlington and were domiciled subsequently or previously elsewhere, the significance being that part year residents pay VA taxes during their allotted time here, while those domiciled are taxed for the full year, subject to credit for state taxes paid elsewhere.
Credit for Taxes Paid to Other States:
Virginia residents are taxed on all income earned from all sources, regardless of location. If you have received income from another state and are required to pay taxes there, you may be eligible for a credit to avoid double taxation. For example, if you are working in New York you may be able to claim a credit for NY taxes paid on your VA resident return. May taxpayers forget to claim this credit, resulting in an overpayment of their tax. Do not claim a credit for taxes paid to the District, instead seek a refund, as DC does not tax non-residents unless you are operating a business or rental activity and paying the franchise tax.
Virginia Late Charges:
Virginia law provides an automatic 6-month filing extension for income tax returns and no application for extension is therefore required. However, the extension is for filing the return, not for payment of the tax and you must pay at least 90% of your tax by the due date of May 1st. If you file your return within 6 months after the due date and the amount of tax due with the return is more than 10% of your total tax liability, you are subject to the extension penalty at the rate of 2% per month for a maximum extension penalty of 12%. If you do not pay the tax in full when you file your return, a late payment penalty will be assessed at the rate of 6% per month or part of a month from the date the return is filed through the date the tax is paid, to a maximum of 30%. If you file your return more than 6 months after the due date, no extension provisions apply and you must compute a late filing penalty of 30% of the tax due with your return. The civil penalty for filing a false or fraudulent return, or for failing or refusing to file a return with intent to evade the tax is 100% of the correct tax. In addition, if you filed a tax due return after the filing date, even if you had an extension, you are liable for interest on the tax due.
Virginia Tax Notices:
As stated above, the financial consequences for not handling your income taxes correctly in Virginia can be severe. Accordingly, if you receive a tax notice from Virginia you should act immediately as delays will likely add to your debt. The first thing you will want to do is review the tax bill for accuracy by comparing it to your tax return. If the tax amount matches, then look for additional charges which may include penalty and interest to see how those were calculated. You have three main options upon reviewing your tax notice: pay in full; set up a payment plan; or take actions to dispute the charges. It is important to act within 30 days, otherwise Virginia may take enforcement actions including filing a tax lien, garnish your wages or levying your bank.
How to Dispute Penalties:
If mitigating circumstances kept you from filing your tax return or paying your tax timely, you may seek penalty forgiveness. Situations giving rise to penalty abatement are rare and specific, however the processes is worth a shot. While the Department of Taxation is aggressive in collection activity, the agency acts reasonably in evaluating forgiveness. The strongest indicator of extenuating factors includes illness or death of the taxpayer or tax preparer; or may involve destruction or theft of records. There can be many other unusual situations that reasonably kept you from filing or paying taxes. The key is drafting a detailed explanation of the circumstances that prevented timely filing and/or payment. Offering copies of supporting documentation, such as medical records, death certificates, divorce records, news reports, weather reports, police reports, witness accounts, etc. is critical for a successful resolution. Offer any support to show that your request was not caused by the negligence or error, including emphasizing your good filing history.
Virginia Business Taxes:
Generally, every corporation organized under the laws of Virginia, every foreign corporation registered with the State Corporation Commission, and every corporation having income from Virginia sources, must file a corporation income tax return. One of the biggest distinctions in operating a business as a S Corporation is that Virginia recognizes the flow through of income, deductions, losses and credits to the individual owner, unlike the District of Columbia which requires registering and payment of the corporate franchise tax. As an S Corporation, an entity with a legal existence separate from its owners, the business does not pay any income tax but passes its income and expenses through to its shareholders to be included on their separate income tax returns. The corporation may still be responsible for sales and non-resident withholding taxes and advance registration is required with the Virginia Department of Taxation.