Virginia Department of Taxation

1
VirginiaDepartment of Taxation

• What isnt new for 2005?

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Whats going on in Virginia?

• Major Tax Reform bill passed by 2004 Special
  Session of the Virginia General Assembly
• Major Project to replace agencys 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
Whats 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-fatheringand 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

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Whats new in Virginia?

• Individual Income 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

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Whats 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
Whats 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.

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Whats 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.

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Whats 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

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Whats 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

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Whats 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

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Whats new in Virginia?

• Individual Income Tax The Age Deduction
• Whats 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
  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

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Whats 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

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Whats 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).

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Whats 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

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Whats 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
  spouses 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.

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Whats 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 spouses 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

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Whats 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).

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Whats 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.

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Whats 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, dont 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.

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Whats 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

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Whats 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.

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Whats 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

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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 preparers computer into ours!

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

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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.

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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

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Whats 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

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Whats new in Virginia?
Paid Tax Preparer Electronic Medium and 2D
Barcode Filing Requirements What is a 2D
Barcode?
The 2D Barcode
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Whats 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
Whats 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

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As a paid tax preparer, which channel should you
use?
33
Whats 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
Whats 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
Whats new in Virginia?

• Whats 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 primarys 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

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Whats new in Virginia?

• Important Contact and Resource Information
• TAXs web site is located at www.tax.virginia.go
  v
• 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

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VA TAX Web SiteWed Love to have you visit us!

Click here
38
The Tax Professional Page

Click here to sign up for the Tax Professional
email group
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Pass-Through Entities

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

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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
•  

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Pass-Through Entities

• New Forms and Schedules
•  
• Form 502 PTE Return, Schedule 502A for Allocation
  and Apportionment, and Schedule VK-1, to report
  each Owners 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 Virginias 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 Dealers 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 Dealers Discount Rates - Vending Machine
•  
• For sales of
• 0 to 62,500 .0320
• 62, 501 to 208,000 .0240
• 208,001 .0160

51
Sales Use Tax 2004

• New forms were mailed in early September
•  
• Quarterly filers were provided with a special
  worksheet to compute the tax under the old and
  new rates occurring in the quarter ending
  September 30, 2004.
•  

52
Sales Use Tax 2004

• Transitioning to the new rate
•  
• Email sent to Tax Professional Group on July 1st
  providing heads-up that Notification Letter was
  being mailed to all registered dealers
• Email sent on July 2nd to all commercial tax
  preparation software companies registered with
  NACTP
• Notification Letter mailed to over 169k dealers
• Web page and Tax Professional Group Email will be
  primary source of subsequent communications

53
Sales Use Tax 2004

• The Qualified food tax rate changes
•  
• Current state food tax rate of 3 remains in
  effect through June 30, 2005.
•  
• On July 1, 2005, the state food tax rate on
  qualified food will decrease to 2.5
•  
• New combined rate 3.5
•  
•  

54
Sales Use Tax 2004

• Additional qualified food tax rate changes
•  
• Reductions of 0.5 each scheduled for 7/1/06 and
  7/1/07
• Food tax rate planned decreases only no change
  to the definition of food (food for home
  consumption as defined by the Food Stamp Act of
  1977, 7 U.S.C. 2012.)
•  
•  
•  

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Working together, we can make filing and paying
taxes fast and easy for the citizens of
Virginia. Thank you!