The state government took advantage of the opportunity offered by the federal Tax Reform Act of 1986 to modify the state income tax system -- the first major change in 15 years. For the most part, the Virginia Tax Reform Act of 1987 canceled what would have been an unlegislated tax windfall by raising the filing threshold, increasing exemptions and the standard deduction, and modifying tax rates.
If you were a resident of Virginia for all of 1987, you may file the short Form 760S if you can answer "no" to all the questions on page 2 of the tax instruction booklet. If you don't qualify, you must use the long Form 760. The balance of this section applies to Form 760; if you use the short form, you should not need further assistance, but may find the following explanations helpful. Filing Status
The filing categories on the Virginia return have not changed from 1986: single, married filing jointly, married filing separately and married filing separately on a combined return. Virginia doesn't provide a filing status corresponding to the federal head of a household or widow(er) with dependent child.
A Virginia joint return is authorized only if you filed a joint federal return or if neither spouse was required to file a federal return. But you may use the combined separate category whether you filed your federal return jointly or separately.
Combined separate filing is usually the better method if both spouses had Virginia income, but try both joint and combined separate filing to see which method yields the lower total tax. If you file a combined separate return, use column A for the wife's data, column B for the husband's. All other filers use column B only.
Exemptions Virginia retained the extra personal exemptions for age and blindness that were eliminated under federal rules, so be sure you check all the applicable boxes on lines 5a and 5b. This year, each personal exemption and exemption for dependents is worth $700, up from the $600 allowance of 1986. (The allowance goes up again for 1988).
In addition to the extra exemption for age or blindness, there is an additional $200 allowance for each taxpayer (but not for dependents) who was 65 or older or blind on Dec. 31. For the elderly, this is a decrease from the $400 allowance of the previous year, but it's new for the vision-impaired, who didn't get this extra in 1986.
Income Transfer to your Virginia return, as a single figure, your federal adjusted gross income. If you are filing combined separate returns, enter in column A and B the amounts attributable separately to each spouse. Don't subtract any Social Security or Railroad Retirement benefits that were included in your federal income; although these are not taxable in Virginia, they will be eliminated in a later step. Adjustments
All the adjustments you had claimed on your federal return are allowed for Virginia. However, this allowance is automatic and requires no entry on your Virginia return, because the starting point for Virginia tax purposes is your federal adjusted gross income from line 30 of IRS Form 1040, after your adjustments had been subtracted.
The elimination of the tax credit for a two-earner couple in turn eliminates the need for a compensating addition to Virginia income. But you must add on your Virginia return any interest earned on obligations of states other than Virginia (and of the Virgin Islands and Puerto Rico) not reported on your federal return.
If you own shares in a tax-free mutual fund or unit trust, the total amount to be added for Virginia may be reduced by the amount of income attributable to Virginia, Virgin Island or Puerto Rican debt securities. The fund or trust sponsor should have provided you with a listing that defines the percentage that each state's issues bears to the total portfolio.
If on your federal return you used either five-year or 10-year averaging for a lump-sum distribution from a qualified retirement plan, you must add back some or all of the amounts effectively omitted from federal income. Use the work sheet on page 14 of the instruction booklet to calculate this addition.
An addback is also required in some cases if you used the Accelerated Cost Recovery System for depreciation of business property (on federal Form 4562). Use Virginia Form 302 to report ACRS deductions taken on federal Schedule C or allocated to you from a partnership, a trust or an S corporation.
Subtractions In addition to the $200 extra allowance for age or blindness mentioned above, you should subtract from Virginia income any interest on federal obligations reported on your federal return, and any state income tax refund to the extent it was included in federal income.
This is the point at which you subtract Social Security and Railroad Retirement benefits included in the income figure you entered on line 6. If you qualified for a Schedule R credit on your federal return, you may subtract the amount of disability income used on Schedule R to calculate the federal credit (not the amount of the credit itself). Attach a copy of Schedule R to your Virginia return.
Pension or retirement income of a retired employee of the state or any of its subdivisions or agencies (or by the surviving spouse of such an employee) is exempt from Virginia income tax. Income from the qualified retirement plan of a Virginia institution of higher learning may also be excluded.
If part of your retirement benefit is based on service at an out-of-state institution, the excludable part is derived from the ratio of covered Virginia contributions to total contributions made on your behalf everywhere. Attach a statement to your return showing the calculations.
You may not claim multiple benefits on the Virginia return. If you elect to claim the exclusion of Virginia pension payments, you may not use either the disability income subtraction explained above or the credit for the elderly, explained below. You may want to do some scratch-pad figuring to see which of the three benefits will help you the most.
Foster parents may subtract $1,000 for each child living in their home under permanent foster care, if you have claimed the child as a dependent on both your federal and Virginia returns. Attach a statement to your return certifying to the information required by page 9 of the instruction booklet.
If you itemized deductions on your federal return and claimed the standard 12 cents a mile for the use of your car for charitable purposes, you may subtract an extra 6 cents a mile on your Virginia return. Attach a statement showing the calculation.
You are permitted to subtract certain foreign source income to the extent it appeared in federal income, including interest and dividends, rents and royalties and capital gains derived from sources and property outside the United States.
Deductions You may itemize deductions on your Virginia return only if you itemized on your federal return (in fact, you must itemize in that event). If you don't itemize, the standard deduction has been simplified this year, and increased for some taxpayers. The 1987 standard deduction is a flat $2,000 on all returns except for married persons filing separate returns, where it is $1,000 each.
If you are married and file a combined separate return, you are not required to split the deduction evenly -- that is, $1,000 each. You may allocate the $2,000 in full to either spouse, or to both husband and wife in whatever proportion you wish.
But if you can be claimed as a dependent on someone else's tax return, your standard deduction is limited to either the normal amount explained above or the amount of your earned income, whichever is less.
Virginia itemized deductions are the same as your federal itemized deductions with two exceptions. One of these is the extra 6 cents a mile for charitable driving. But this doesn't change any numbers on your itemizing schedule; it is instead taken as an extra subtraction from Virginia income.
The other exception is any deduction you claimed on Schedule A for state and local income tax paid. In Step 2 of Form 760, the right-hand box provides the necessary lines to carry over your total deductions from the federal return, then subtract state income tax claimed to get the net Virginia deduction.
The state tax booklet includes a Virginia Schedule A; it's really only useful if you don't file a federal return but are required to file a Virginia return. All other taxpayers who itemize must attach to your Virginia return a copy of federal Schedule A.
Child Care Credit Virginia allows a deduction for child and dependent care, rather than a tax credit as on the federal return. So don't use the federal credit for your Virginia return. Instead, carry over to line 13 of Form 760 the amount of allowable expenses from your federal return, and attach a copy of Form 2441 or Part II, Schedule I of Form 1040A to your Virginia return.
Like the federal ceiling, the Virginia limit on the deduction is $2,400 for the care of one dependent and $4,800 for two or more. If you're filing a combined separate return, the amount of the deduction may be allocated to either spouse or split between them in any ratio desired.
Tax Credit for the Elderly You may qualify for a special tax credit if you were at least 62 years old on Dec. 31, 1987, had adjusted gross income of less than $16,734 and received less in Social Security or Railroad Retirement benefits than an age-specified amount shown on page 17 of the instruction booklet. The credit is calculated in Part IV of Form 760.
Tax Computation When you've arrived at your Virginia taxable income, you find your tax either from the tax tables, starting on page 18 of the instruction booklet, or from the tax rate schedule on the same page. (Note that on the tax rate schedule, the break point for the start of the 5.75 percent rate has been increased to $14,000.) If your Virginia taxable income is greater than $42,000 (the upper limit of the tables), your tax is $2,180 plus 5.75 percent of the excess over $42,000.
Tax Credits At this point, you're ready to subtract any credits due from your Virginia tax. One of these, the tax credit for the elderly, has already been explained. If you paid income tax to another state, you may be eligible for a credit against your Virginia tax. Instructions are on page 17, and the credit is figured in Part III of Form 7609. You must attach a copy of the other state's return to your Virginia return.
Other tax credits include the Neighborhood Assistance Act credit, the renewable energy source credit, the Urban Enterprise Zone credit and the conservation tillage equipment credit. Are all mentioned on page 13 of the instruction booklet. If you're eligible for the credit, you probably know the rules already; if you don't, contact your local Virginia tax office for assistance and the necessary forms.
Refund Contributions If your tax computations show an overpayment, you may contribute part or all of your refund to support the state conservation program for nongame wildlife (line 24a). You may also contribute $2 of your refund to either the Democratic or Republican state parties. (On a joint or combined separate return, each spouse may elect this contribution independently.)
These contributions may only be designated if you have overpaid and are due a refund; otherwise, you may only make such contributions directly to the political parties or to the Commission of Game and Inland Fisheries. Do not send additional money with your tax return.
Accelerated Refund If you are due a refund, you may be able to get your check faster than usual. You must have filed a Virginia return for 1986, and your name, address, Social Security number and filing status must be the same on this return as it was on the 1986 return.
If you meet these qualifications, you may want to complete the Accelerated Refund Form 760AR (the yellow form in the instruction booklet) and attach it to your return. Form 760AR is a new attempt this year to get refund money back to qualifying taxpayers faster than usual. Completion of the form is optional, but it may be worth a try if you have a refund coming.