Virginia’s Amended 2023-2024 Budget Includes Several Taxpayer-Friendly Changes
On September 14, 2023, Virginia Gov. Glenn Youngkin (R) signed H.B. 6001, amending the Virginia budget for the 2023-2024 biennium. The bill increases the subtraction for disallowed business interest deductions under Internal Revenue Code Section 163(j) and the individual standard deduction, adds a new individual income tax rebate, removes the age limitation for military benefits, reinstates the annual sales tax holiday, and adds limitations to the "subject to tax" and "unrelated party" addback exceptions.
Disallowed IRC Section 163(j) Deductions
H.B. 6001 increases the subtraction from the interest expenses disallowed under IRC section 163(j). For tax years beginning after January 1, 2024, 50% of the disallowed interest expense can be deducted. The original subtraction of 20% was increased to 30% for tax years beginning after January 1, 2022. Virginia is the only state that provides a separate state subtraction in this manner. The governor’s office has estimated that this change will save Virginia businesses $10.3 million in tax year 2024.
Standard Deductions for Individuals
For individual income tax purposes, the budget bill increases the standard deduction for Virginia residents by almost double from the 2022 standard deductions of $4,500 for single individuals and $9,000 for married persons.
- For tax years beginning on and after January 1, 2022, but before January 1, 2024 (previously, January 1, 2026), the standard deduction is $8,000 for single individuals and $16,000 for married persons (one-half of those amounts for a married individual filing a separate return).
- For tax years beginning on and after January 1, 2024, but before January 1, 2026, the standard deduction is $8,500 for single individuals and $17,000 for married persons (one-half of those amounts for a married individual filing a separate return).
The additional standard deduction amounts are contingent on the Virginia Auditor of Public Accounts certifying individual withholding growth of at least the estimated rate from July 2023 to December 2023.
Beginning with tax years 2026, the standard deductions are set to return to the 2019 amounts of $3,000 for single individuals and $6,000 for married individuals.
Individual Income Tax Rebate for Virginia Residents
The bill establishes the 2023 individual income tax rebate fund, which provides a rebate of up to $200 for individuals, or up to $400 for married persons filing joint returns, for Virginia residents who file their 2022 Form 760, “Individual Income Tax Return,” by November 1, 2023. To be eligible to receive the rebate, taxpayers must have had a tax liability.
To provide taxpayers with additional details about the rebate (including how to receive it), the Virginia Department of Taxation has posted guidance on its website. Per the guidance, taxpayers who owe money to specific government agencies may have the rebates applied to those debts.
Military Deductions
Beginning in tax year 2022, Virginia individuals receiving military retirement benefits can subtract the following amounts from gross income:
- for tax years beginning on and after January 1, 2022, but before January 1, 2023, up to $10,000 of military benefits;
- for tax years beginning on and after January 1, 2023, but before January 1, 2024, up to $20,000 of military benefits;
- for tax years beginning on and after January 1, 2024, but before January 1, 2025, up to $30,000 of military benefits; and
- for tax years beginning on and after January 1, 2025, up to $40,000 of military benefits.
The term “military benefits” means any military retirement income received for service in the U.S. Armed Forces, qualified military benefits received through IRC Section 134, benefits paid to the surviving spouse of a U.S. Armed Forces veteran under the Survivor Benefit Plan program established by the Department of Defense, and military benefits paid to the surviving spouse of a U.S. Armed Forces veteran.
Under prior law, Virginia resident veteran taxpayers receiving military benefits had to be at least 55 years old to subtract portions of the military retirement income from their Virginia income tax base. The new law removes the age restriction.
Sales and Use Tax Holiday
The bill reestablishes Virginia’s sales tax holiday for Energy Star or Watersense-qualified products, school supplies, clothing and footwear, and some hurricane preparedness items. The 2023 sales tax holiday will occur October 20-22.
Intangible Holding Company Addback Exceptions
Subject to Tax Exception
Virginia taxpayers must add back, to the extent excluded from federal taxable income, intangible expenses and costs directly or indirectly paid to a related member. One exception to that rule affects related members that are subject to a tax based on or measured by net income or capital imposed by Virginia, another state, or a foreign government. For tax years beginning after January 1, 2024, the exception is limited to the portion of income received by the related member that owns the intangible property.
Unrelated Party Exception
There is an exception for a related member deriving at least one-third of its gross revenues from licensing to unrelated parties. It is limited to the portion of income received by the related member that owns the intangible property and is derived from licensing agreements for which the rates and terms are comparable to agreements the related member has entered into with unrelated entities.