Bulletin Number
VTB 87-3
Tax Type
Corporation Income Tax
Declaration of Estimated Income Tax by Individuals
Estate Tax
Individual Income Tax
Description
1987 Legislative Changes: Income Taxes
Topic
Reports
Date Issued
07-01-1987
Virginia Tax Bulletin
Virginia Department of Taxation
87-3
DATE: July 1, 1987
SUBJECT: Income Taxes - 1987 Legislative Changes
The 1987 session of the General Assembly enacted several law changes which impact the corporation and individual income taxes. Included are:
House Bill 1119, the Virginia Tax Reform Act of 1987, which represents Virginia's response to the federal Tax Reform Act of 1986; and
Senate Bill 554, which sets forth various technical corrections to the Virginia tax law that were necessitated by changes in federal law under the federal Tax Reform Act of 1986.
A brief summary of the provisions of House Bill 1119 is provided below. Brief summaries of other income tax changes, organized by the type of tax, follow the summary of House Bill 1119.
HOUSE BILL 1119
THE VIRGINIA TAX REFORM ACT OF 1987
THE VIRGINIA TAX REFORM ACT OF 1987
House Bill 1119, the Virginia Tax Reform Act of 1987, (Chapter 9 of the Acts of Assembly) made the following changes to the individual and corporation income tax laws:
INDIVIDUAL INCOME TAX:
• Top Bracket Amount: Amended Va. Code § 58.1-320 to raise the starting income level for the top 5 3/4% income tax bracket from $12,000 as follows:
Taxable Year Income at Which 5 3/4% Rate Begins
1987 $14,000
1988 $15,000
1989 $16,000
1990 and thereafter $17,000
• Personal Exemption Amount: Amended Va. Code § 58.1-322 to increase the personal exemption for each taxpayer and dependent from $600 as follows:
Taxable Year Personal Exemption Amount
1987 $700
1988 and thereafter $800
• Standard Deduction Amount: Amended Va. Code § 58.1-322 to replace the present $2,000 maximum standard deduction as follows:
Taxable Year Single Married Married Filing Separately
1987 $2,000 $2,000 $1,000
1988 $2,700 $2,700 $1,350
1989 and $3,000 $5,000 $2,500
thereafter
• Blind and Aged Deduction: Amended Va. Code § 58.1-322 to continue to provide additional personal exemptions to blind taxpayers and those aged 65 or over for taxable years beginning on and after January 1, 1987. The present $400 additional deduction for taxpayers aged 65 or over has been repealed, but blind and elderly taxpayers have been provided an additional deduction of $200 for taxable year 1987.
• Filing Threshold Amounts: Amended Va. Code § 58.1-321 to increase the filing threshold from $3,000 to $5,000 for single taxpayers and $8,000 in combined income for married taxpayers, effective for taxable years beginning on and after January 1, 1987. Persons whose Virginia adjusted gross income falls below the filing threshold are not required to file a return unless they wish to obtain a refund of withholding or estimated taxes paid.
Additionally, effective July 1, 1987, persons who expect their Virginia adjusted gross income to be below the threshold amounts may file a Form VA-4, Withholding Exemption Certificate, with their employer so that no Virginia income tax is withheld from their wages.
ACRS ADDITIONS AND SUBTRACTIONS FOR CORPORATIONS AND INDIVIDUALS:
• Repealed Va. Code §§ 58.1-323, 58.1-322(B)(6) and 58.1-402(B)(3), amended Va. Code §§ 58.1-322(C)(8) and 58.1-402(C)(9), and added Va. .Code §§ 58.1-323.1 and 58.1-323.2 to fully conform to the federal Accelerated Cost Recovery System (ACRS) for taxable years beginning on and after January 1, 1988 for both individuals and corporations. In addition, beginning with taxable year 1988 returns, individuals and corporations will be able to recover any outstanding Virginia ACRS additions from previous years as follows:
Percentage of Additions Allowed as Subtraction
1988 1989 1990 1991 1992
Individuals 66.7% 33.3%
Corporations 10% 10% 30% 30% 20%
INCOME TAX WITHHOLDING
• New Tables: The income tax withholding tables have been revised effective for wages paid after June 30, 1987. This change should produce immediate savings to individual taxpayers whose employers withhold Virginia income tax. The withholding tables will also change on January 1, 1989 and January 1, 1990 to reflect further changes brought about by House Bill 1119. (By now, employers should have received new withholding booklets and instructions.)
OTHER ENACTED INCOME TAX LEGISLATION
ESTIMATED TAX FOR INDIVIDUALS:
• Required Payment: House Bill 1043 (Chapter 611) and Senate Bill 421 (Chapter 599) both amended Va. Code § 58.1-492 to increase the percentage of individual income tax that must be remitted by means of estimated and/or withholding payments from 80% to 90%. Effective Date: Taxable years beginning on and after January 1, 1987; however, the Department of Taxation will not impose the underpayment penalty for taxable year 1987 in cases where the taxpayer pays at least 80% of the tax liability.
• Threshold for Declarations: Senate Bill 421 also amended Va. Code § 58.1-490 to provide for changes to the estimated tax filing threshold. The law previously required the filing of a declaration of estimated tax when an individual's federal adjusted gross income, excluding wages on which tax was withheld, was reasonably expected to exceed $400, plus the sum of the individual's personal exemptions.
• The new law gives the Tax Commissioner the regulatory authority to set the requirements for the filing of a declaration of estimated tax. The bill provides that the filing threshold determined by the Tax Commissioner shall be an amount which takes into account the additions, subtractions, and deductions set forth in Va. Code § 58.1-322, the credits set forth in Va. Code §§ 58.1-330, 58.1-331, 58.1-332, and 58.1-333, and the filing exclusions set forth in Va. Code § 58.1-321.
The Tax Commissioner is currently developing an emergency regulation which will establish the estimated declaration threshold in accordance with the statutory requirements. Additional information on the proposed threshold will be disseminated as soon as possible, but this threshold will not be final until the adoption of the regulation, prior to January 1, 1988, under the provisions of the Administrative Process Act.
Effective Date: Taxable years beginning on and after January 1, 1987.
• Addition to Tax for Underpayment: Senate Bill 554 (Chapter 484) amended Va. Code § 58.1-15 to provide that in computing the addition to tax for the underpayment of estimated taxes by individuals and corporations, the interest rate for the third month following the taxable year shall be applicable during the first 15 days of the fourth month (or through May 1 in the case of a calendar year individual return).
For example, for an individual income taxpayer filing on a calendar year basis, the interest rate in effect for the quarter ending March 31 will also apply through May 1. For a fiscal year filer whose taxable year ends on June 30, the interest rate in effect for the quarter ending September 30 shall also apply through the October 15 due date of the return. Effective Date: Taxable years beginning on and after January 1, 1987.
For new provisions requiring the payment of estimated taxes by estates and trusts, see section on page 6 on ESTATES AND TRUSTS.
INDIVIDUAL AND CORPORATION INCOME TAXES:
• Alternative Depreciation System: Senate Bill 554 (Chapter 484) provides that the new federal Alternative Depreciation System is not subject to the excess cost recovery additions and subtractions set forth in Va. Code § 58.1-323. Effective Date: Taxable years beginning on and after January 1, 1987.
For provisions relating to the Accelerated Cost Recovery System, see the section on page 2 relating to ACRS ADDITIONS AND SUBTRACTIONS OF CORPORATIONS AND INDIVIDUALS.
INDIVIDUAL INCOME TAX:
• Two-Earner Married Couple Deduction: Senate Bill 554 (Chapter 484) amends Va. Code § 58.1-322 to repeal the addition to federal adjusted gross income for the federal two-earner married couple deduction. This addition was eliminated due to the repeal of the federal two-earner married couple deduction under the federal Tax Reform Act of 1986. Effective Date: Taxable years beginning on and after January 1, 1987.
• Lump Sum Distributions: Senate Bill 554 also amended the Va. Code § 58.1-322 provisions relating to additions to federal adjusted gross income for lump sum distributions from qualified retirement plans. The change reflects the provisions of the federal Tax Reform Act of 1986, specifically addressing both the 5-year and 10-year averaging provisions of the new federal law. Effective Date: Taxable years beginning on and after January 1, 1987.
• Deduction for Virginia National Guard Pay: House Bill 1233 (Chapter 615) amends Va. Code § 58.1-322 to provide a deduction from federal adjusted gross income of up to $3,000 in pay received from 39 days of active or inactive service in the Virginia National Guard. The deduction will be limited, however, to persons of the rank of 03 (Captain) or below. Effective Date: Taxable years beginning on and after January 1, 1989.
CORPORATION INCOME TAX:
• Bad Debt Deduction for Savings and Loans: House Bill 1175 (Chapter 614) amends Va. Code § 58.1-403 to restore the pre-1987 percentage of income bad debt deduction provisions used by savings and loan associations. Savings and loan associations which use the percentage of income method to compute their federal bad debt deduction will continue to use the 40% bad debt deduction used before the federal Tax Reform Act of 1986, rather than the 8% deduction now provided under federal law. Thus, this bill will preserve the Virginia income tax treatment of savings and loan bad debt deductions by keeping the percentage of income used for Virginia purposes at the level used prior to federal tax reform. Effective Date: Taxable years beginning on and after January 1, 1987.
• Employee Stock Ownership Plans: Senate Bill 554 (Chapter 484) amended Va. Code § 58.1-402 to repeal the subtraction for employer contributions to employee stock ownership plans (ESOP's). This provision was repealed due to the repeal of the federal ESOP credit under the-federal Tax Reform Act of 1986. The Virginia addition required for ESOP credit carryovers was retained because the federal Tax Reform Act of 1986 continues to allow the federal credit to be carried forward. Effective Date: Taxable years beginning on and after January 1, 1987.
ESTATES AND TRUSTS:
• Estimated Payment Requirements for Estates and Trusts: Senate Bill 554 (Chapter 484) amends Va. Code §§ 58.1-490, 58.1-492, and 58.1-493 to subject estates and trusts to the same requirements as individual taxpayers for the filing of estimated taxes. This new provision reflects a similar change made by the federal Tax Reform Act of 1986. Under this provision, an estate will be required to file a declaration of estimated tax only with respect to a taxable year ending two or more years after the date of death of the decedent, but trusts will be required to file declarations of estimated tax annually. Effective Date: Taxable years beginning on and after January 1, 1988.
ALL TAXES:
• Differential Interest Rate: Senate Bill 554 (Chapter 484) amended Va. Code § 58.1-15 to adopt the differential interest rates for overpayments (refunds) and underpayments (assessments) of taxes that are set forth in Internal Revenue Code §§ 6621(a)(1) and 6621(a)(2). Pursuant to these provisions, the interest rate on underpayments is one percentage point above that on overpayments. Effective Date: January 1, 1987.
If you have any questions on these legislative changes, please feel free to call the Department of Taxation, or write us at P. O. Box 6-L, Richmond, Virginia 23282.
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