Virginia Department of Taxation

1
VirginiaDepartment of Taxation

• What isnt new for 2005?

2
Agenda

• Introductions
• Overview of 2004 - Gerald Gwaltney, Deputy
  Commissioner
• Return Processing Howard Overbey, Processing
  Manager
• Legislative Form Changes for 2004 Lee
  Mikelson, Channel Services Manager
• Customer Services - Pam Inge, Senior Management
  Analyst

3
Overview of 2004
Virginia Capital June 2004
4
Overview of 2004

• Legislation Several significant bills passed by
  the 2004 Virginia General Assembly, including a
  Major Tax Reform bill.
• IRMS Replacement of agencys host accounting
  system now scheduled for scheduled for August
  2005
• Filing Season 2004 A successful filing season.

5
2004 Key Legislation

• HB5018, a comprehensive tax reform bill passed
  during a special session of the 2004 Virginia
  General Assembly, which includes
• Changes to both individual and corporate income
  taxes
• An increase in the sales and use general state
  tax rate and the vending sales tax rate along
  with scheduled decreases in the food tax rate
• Increases in the cigarette excise tax
• New reporting requirements for Pass-through
  Entities, including S Corporations and
• A new tax, the Tobacco Products tax

6
2004 Key Legislation

• SB526, which advanced Virginias date of
  conformity with the Internal Revenue Code (IRC)
  to 12/31/03
• Includes exceptions for the 30 and 50 special
  bonus depreciation and the 5-year Net Operating
  Loss (NOL) carryback provisions
• With extensive federal legislation passed in
  2004, agency is presented with challenges and
  timing issues

7
2004 Key Legislation

• HB1159, requires certain Paid Tax Preparers to
  file individual returns using either electronic
  means or, if filing on paper, software that
  includes 2D barcode technology
• Virginia joins several other states that have
  established return filing mandates for certain
  paid tax preparers
• Trend is expected to continue, as more states
  announce adoption of filing mandates for paid tax
  preparers
• For Virginia, our focus will be to work with the
  paid tax preparer community to promote voluntary
  compliance

8
IRMS Update

• Implementation of the agencys new host
  accounting system rescheduled for August 2005
• Issues with converting millions of records from
  current host to new host (IRMS) key reason for
  delay
• IRMS now being updated with legislative changes
• Testing of IRMS and new procedures now being
  actively tested

9
Filing Season 2004Results

• Electronic filing growth continued
• Refunds issued fast, faster, fastest.
• Error rate continues downward trend

10
Returns Processed
11

• As of November 13, 2004

12
Refund Turnaround
Current Year Refunds, All Tax Types
As of November 13, 2004
13
Refund Information
14
Error Rates

• As of November 5, 2004
• Rate Inventory
• Filing Season 2001 22.36 238,099
• Filing Season 2002 10.76 37,848
• Filing Season 2003 10.13 33,509
• Filing Season 2004 9.77 16,157

15
Individual Error RatesElectronic vs Paper Filed
ReturnsAll Years All Types

• Electronic Returns 2.98
• Paper Filed Returns 13.61
• Overall Error Rate 9.77
• As of November 15, 2004

16
Most Common Errors

• Estimated, Extension Other Payments amounts
  claimed do not equal TAX Records
• Tax Roll Problems Names, SSNs, and birth dates
  do not match tax roll
• Deductions and Subtractions errors

17
Results

• With lower error rates and refunds being
  issued faster than ever, the payment of refund
  interest has dropped significantly
• For calendar years Interest Paid
• 2004 (Nov 30) 3,039,126
• 2003 4,188,807
• 2002 6,404,312

WOW
18
Looking Forward to 2005

• VA TAX faces many challenges in 2005
• Implementing IRMS and the legislation passed by
  the 2004 Virginia General Assembly is a BIG JOB

When we work together, no job is too big.we can
meet the challenges and continue to provide the
citizens of Virginia with top quality customer
services
19
Looking Forward to 2005
And were not the only ones with a big
job! Virginia Capital November 2004
20
Any questions?
21
Return ProcessingA Great Way to Make New Friends!
22
What happens when you mail in a paper return?

• First, the envelope must be opened and then the
  return is extracted and sorted by form type,
  bottom line (refunds vs tax dues) and by taxable
  year e.g., 760CGs, 760 Handprint, 760PYs, and
  763s etc.
• After the returns are opened and sorted, they are
  placed in batches of 50, for easy handling
• For tax due returns with checks, the return
  batches are routed to a special work unit that
  prepares the checks for processing
• After opening, sorting, and batching, the returns
  are screened

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What is return screening?

• Each batch of returns is reviewed by a Screener
• The screener views each return, looking to see if
  all required forms and attachments are present
• If a return is missing forms and/or attachments,
  codes are placed on the return e.g. if a taxpayer
  claims a credit for taxes paid to another state
  but fails to submit the other states return, a
  code is placed on the return indicating that the
  other states return is missing
• After screening, the returns are prepared for
  Data Capture, which can occur using either
  automated screening equipment or manual data
  entry, and then delivered to the Data Capture
  work unit

24
What can go wrong?

• Human Error VA TAX has handled over 2.3 million
  paper individual income tax returns this year
  and with that volume, theres always human error!
  We work diligently to minimize human error the
  staff is trained and cross-trained and work
  product is continually reviewed by supervisors
  and team leaders.
• Taxpayer Error VA TAX regularly receives
  returns with missing documentation. In some
  cases, we even receive returns with no names and
  no SSNs! In addition, we frequently receive
  checks in the mail with no payment vouchers and
  no indication of what the check is even for we
  research over 16,000 checks each month trying to
  determine why the payments were submitted!

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How can you help?

• Before letting your client leave your office,
  make sure the client understands what to mail,
  where to mail it, and when it has to be mailed!
• Taxpayers may leave your office with complete
  returns, but when they get home, they may take
  the return apart and then put it all back
  together and the package you gave your client,
  is not the same package we receive!
• Check out your software read the materials
  available on VA TAXs web site and make sure your
  software is generating forms, vouchers, and other
  documents correctly. The more you know, the
  easier it will be for you to spot problems and
  avoid return processing delays.

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Vouchers An Example

• All payment vouchers include a scanline
• The scanline includes the taxpayers SSN, a form
  code identifying what the payment is for, a
  period or due date, and, in some cases, the
  taxpayers locality code
• If the wrong voucher is used or the information
  in the scanline is incorrect, a taxpayers
  payment will most likely be misapplied e.g., if
  a taxpayer uses the Form 760ES to submit a tax
  due payment, well process that payment as an
  estimated payment and the next thing you know,
  the taxpayer is getting a bill!
• Your software should be programmed to generate
  the correct information in the scanline but
  sometimes software is programmed incorrectly!

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The 760ES Local Filed Scanline An Example
28
The 760ES Local Filed ScanlineWhat it means
29
To learn about Vouchers

• Go to www.tax.virginia.gov
• View the voucher specifications located on the
  tax professional page password is VA_TAX
• Your software should create vouchers based on
  these specifications
• VA TAX tests each software companys vouchers
  but sometimes the software companies make changes
  and dont retest.
• One software company created estimated payment
  vouchers with bad period dates in the scanline,
  and all those payments were applied as late!
• One software company created 760PMTs with the
  wrong taxable year its was 2003, and their tax
  due vouchers said 2000!
• Vendor specifications for returns and schedules
  are also located on the tax professional page!
  Check it out

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What about those 2D barcodes?

• 2D barcode returns
• If you change information on a return with a 2D
  barcode, always change the information using your
  software and reprint the return!
• Educate your client. If they take home the
  return you prepared and it has a 2D barcode, they
  should never white out information and type in
  new information if they cant bring the return
  back to you, then they should line through the
  incorrect information and write in the new
  information. That way we can see that the return
  has been altered and we wont use the 2D barcode.

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Any Questions?

32
Legislative Form ChangesTaxable Year 2004
33
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 was passed late in year, after
  Virginia had gone to print with forms and
  instructions
• We will post supplemental instructions on our web
  site any changes to Virginia returns that
  required because of this new federal legislation
  will be reported using existing FDC addition and
  subtraction fields
• Are instruction booklets advise taxpayers and tax
  professionals to watch our web site for release
  of supplemental instructions
• www.tax.virginia.gov

34
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 and 8 new
  Public School Foundation 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

35
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

36
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

37
Individual Income Tax

• Age Deduction 3 Parts
• Phase-out of the Under Age 65 age deduction
• Grandfathered taxpayers and
• The new income-based age deduction.

38
Individual Income Tax

• The Phase-Out
• For taxable year 2004, only taxpayers born on or
  between January 2, 1940, and January 1, 1942, may
  claim the 6,000 under age 65 age deduction.
• Taxpayers must be 63 or 64 as of January 1, 2005,
  to claim the Under Age 65 age deduction on the
  TY2004 return
• Age 62 not eligible for Under Age 65 age
  deduction as phase-out begins

39
Individual Income Tax

• The Phase-out
• For taxable year 2005, only taxpayers born on or
  between January 2, 1941, and January 1, 1942, may
  claim the 6,000 under age 65 age deduction.
• Taxpayers must be age 64 as of January 1, 2006,
  to claim the Under Age 65 age deduction on the
  TY2005 return
• Age 62 and 63 not eligible for Under Age 65 age
  deduction, as phase-out continues

40
Individual Income Tax

• The Phase-out
• 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
  attained age 65 and older by January 1, 2007,
  will be eligible for an Age 65 and Older age
  deduction

41
Individual Income Tax

• Grandfathered Taxpayers
• 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 may claim the
  full 12,000 age deduction without regard to
  income
• Key Date January 1, 1939

42
Individual Income Tax

• The income based Age Deduction
• Taxpayers born on or after January 2, 1939, who
  attain age 65 during the current taxable year,
  may qualify for an income based age deduction.
• For single filers, the income based age deduction
  is computed by reducing the 12,000 maximum age
  deduction 1 for every 1 that AFAGI exceeds
  50,000.
• For married filers, whether filing jointly or
  separately, the income based age deduction is
  computed by reducing the 12,000 maximum age
  deduction 1 for every 1 that AFAGI exceeds
  75,000.

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Individual Income Tax

• 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.

44
Individual Income Tax

• Whats the AFAGI?
• 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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Individual Income Tax

• Income based 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

46
Individual Income Tax

• Income based Age Deduction
• Example 2
• Married taxpayers filing a joint Virginia return.
  One taxpayer is claiming the income based age
  deduction and the other is claiming the Under Age
  65 age deduction for TY2004.
• 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 (a grandfathered Age 65 and Older age
  deduction would not impact the computation
  either).

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Individual Income Tax

• Income based Age Deduction
• Example 3
• Married taxpayers with a joint AFAGI of 80,000.
  Taxpayers are filing separately. One spouse is a
  Virginia resident. 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.
• 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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Individual Income Tax

• Income based 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.
• 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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Individual Income Tax

• Income based 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.
• 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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Individual Income Tax

• Income based 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 nonresident with no
  VA source income (and thus will not be filing a
  VA return).
• 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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Individual Income Tax

• Income based 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.
• 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.

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Individual Income Tax

• The Age 65 Older
• Income Based Age Deduction
• Critical Points
• The joint AFAGI must always be used for married
  taxpayers, even if
• only one spouse is claiming an income based age
  deduction
• the taxpayers are filing separate federal or
  Virginia returns
• the taxpayers do not live together or
• one taxpayer is not a Virginia resident.
• If the taxpayer is married, use the joint AFAGI.

53
Individual Income Tax

• The Age 65 Older
• Income Based Age Deduction
• Critical Points
• 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.

54
Individual Income Tax

• The Age 65 Older
• Income Based Age Deduction
• Critical Points
• The examples provided demonstrate the calculation
  of a gross income based age deduction.
• For part-year and nonresident returns, the gross
  age deduction must be further reduced i.e., using
  the part-year ratio or 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

56
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.

57
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

58
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!

59

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

60
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.

61
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

62
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
• ATX

63
Whats new in Virginia?
Paid Tax Preparer Electronic Medium and 2D
Barcode Filing Requirements What is a 2D
Barcode?
The 2D Barcode
64
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

65
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

66
As a paid tax preparer, which channel should you
use?
67
Whats new in Virginia?

• Individual Income Tax Form Changes
• For the age deduction changes have added fields
  for birth dates and AFAGI to the 760CG and fields
  for the AFAGI to the Schedule NPY (for Form 760PY
  filers) and Form 763.
• 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

68
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.
• For Schedule CR, have expanded line 30 to clarify
  when and for what reasons taxpayers may claim a
  credit for Clean Fuel
• Added instructional text to the 760PMT

69
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

70
Pass-Through Entities

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

71
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
•  

72
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
•  

73
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, and Form 502E, for
  extensions
•  
• Form 765 Unified Nonresident Individual Income
  Tax Return optional. Includes a Form 765 with
  a Part II Summary of the individual Schedule
  VK-1s, and a Schedule of Participants (use of
  Form 763 by Unified Filers discontinued for
  TY2004).
•  

74
Corporate Income Tax

• New Schedule 500AB for Add Back
• Requires add back of certain intangible expenses
  i.e., DHC legislation.
• VA TAX will not mass mail TY2004 forms and
  instruction booklets to corporations
• Research indicates 95 of returns are
  computer-generated.
• Notification of legislative changes and
  information on how to obtain forms scheduled to
  be mass mailed to all registered businesses mid
  December.

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Tobacco Products A New Tax

• 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.

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Tobacco Products

• All returns due by 10th of following month i.e.,
  all taxpayers liable for tax are required to
  remit return with payment monthly, with first
  return due April 10th, 2005.
• Corporate mass mailer includes a registration
  form for businesses liable for the Tobacco
  Products tax to complete and mail back to VA TAX.
• Returns will be mailed to registered businesses
  in February 2005.

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Sales Use Tax 2004
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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.
•  

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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

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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.
•  

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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
•  
•  

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Sales Use Tax 2004

• Additional qualified food tax rate changes
•  
• Reductions of 0.5 each scheduled for July 1,
  2006, and July 1, 2007.
• 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.)
•  
•  
•  

83
Individual Income Tax Return Preparation Tips
and Customer Services
84
Who Is a Resident?

•  

Virginia law provides for two types of residents
Domiciliary and Actual  
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Domiciliary Resident

•  

• A domiciliary resident is an individual whose
  legal state of residence is Virginia, even if
  that person does not actually live in Virginia
  during the taxable year. Examples of domiciliary
  residents who do NOT live in the state include
• Members of the military who enter the service
  from Virginia (i.e., Virginia is the home of
  record)
• Students who maintain Virginia as their state
  of legal residence, but who attend school in
  another state
• Virginia residents who accept employment in
  other countries for extended periods and do not
  take steps to abandon their Virginia domiciles.

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Actual Resident

•  

An actual resident is an individual who resides
in Virginia for more than 183 days during the
taxable year. The period of residency does not
have to be consecutive days.   It is possible to
be an actual resident of Virginia and a
domiciliary resident of another state. For
example, dual residency commonly occurs when a
domiciliary resident of another state enrolls in
a Virginia school and lives here during the
school year.  
87
Determining which Form to use

• A resident spouse and a nonresident spouse may
  not file a joint return on Form 760. The
  resident spouse files Form 760. The nonresident
  spouse files Form 763 if he or she has Virginia
  source income to report.
•  
• A full-year resident spouse and a part-year
  resident spouse may not file jointly on Form 760,
  but may file a joint return on Form 760PY.
• The Residency section of the
• 760 instruction booklet has
• been re-written
• to improve accuracy
• check it out.

•  

88
Military Issues

• Visit our web site at www.tax.virginia.gov
• Go to Individual,
• General Information, and
• Click on the icon for
• Virginia Tax Tips for Military Personnel.

89
Military Issues

• Tax Tips include
• Filing Requirements
• Resident Military Personnel
• Nonresident Military Personnel
• Spouses and dependents
• Filing separate returns
• Deduction for Military Basic pay
• Exemption for Virginia National Guard pay
• Subtraction for Combat and Hazardous Duty Pay
• Claiming more than one subtraction
• Filing and paying extensions
• September 11th Disaster Relief

90
Military Issues

• Exemption for Virginia National Guard Income
• The wages or salaries received for active and
  inactive service in the National Guard of the
  Commonwealth of Virginia by any person with a
  military rank of 03 or below may be subtracted on
  the Virginia return to the extent the amount
  subtracted does not to exceed the amount of
  income derived from 39 calendar days of such
  service or 3,000, whichever is less.

91
Military Issues

• Exemption for Virginia National Guard Income
• If a National Guard service member has been on
  active duty status for 90 consecutive days, the
  service member may also qualify for the basic
  military pay subtraction, an exemption allowed
  for the first 15,000 of basic military pay.
• If the service members active duty status
  exceeds 90 consecutive days during a period that
  crosses taxable years, the service member will
  qualify for the basic military pay subtraction in
  the 2nd taxable year, but only to the extent of
  pay earned in that taxable year.

92
Military Issues

• Filing Status 3 Splitting Income
• For married taxpayers with different residency
  statuses
• Use the federal return and all other available
  documentation to determine income, exemptions,
  and deductions as if the taxpayers had filed
  separate federal returns.
• In general, the taxpayer claiming an exemption
  for a dependent must be reporting at least half
  of the federal adjusted gross income
• In computing itemized deductions, determine each
  taxpayers share of the itemized deductions based
  on which taxpayer incurred the expenses but if
  that is not possible, allocate the itemized
  deductions proportionately based on each
  taxpayers respective share of the federal
  adjusted gross income reported on the joint
  federal return.

93
Amending Individual Returns

• Taxpayers should file an amended Virginia return
  whenever a change is made to the federal return.
• Prepare a new individual return and complete the
  appropriate lines for amending the return.
• Protective claims must be filed with the Tax
  Commissioner.

94
Amending Individual Returns

• Due Dates for Refund Claims
• 3 years from original due date (including valid
  extensions) or
• For NOL carrybacks, 3 years from the due date of
  the loss year return or
• 2 years from actual date of payment or
• 1 year from FINAL federal determination.

95
Amending Individual Returns

• Federal Approval
• Proof of IRS approval may be needed to complete
  processing of amended returns based on federal
  changes.
• IRS statement or copy of refund check is
  acceptable.
• Taxpayers should
• maintain complete
• records.

96
Important Contact and Resource Information

• TAXs web site is located at www.tax.virginia.go
  v
• Certain areas of the Tax Professional section
  are password protected
• the password is VA_TAX
• 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
98
The Tax Professional Page

Click here to sign up for the Tax Professional
email group
99
The Tax Professional Page

Check out our Policy Library. It has everything,
from the Code of Virginia to Rulings of the Tax
Commission all the way to the early 80s! And,
its searchable!
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Working together, we can make filing and paying
taxes fast and easy for the citizens of
Virginia. Thank you!