What is tax conformity?
Tax conformity is a state’s adoption of the federal definitions of income, as contained in the Internal Revenue Code (IRC). For individuals, it’s the calculation of federal adjusted gross income; for businesses, it’s federal taxable income. Traditionally, Virginia adopts those definitions as of a fixed date — usually, but not always, Dec. 31 of the previous year. This means that each year, the date of conformity must be advanced through the legislative process so that taxpayers can file their returns for the previous tax year.
What is the current date of conformity?
Currently, Virginia’s conformity date is Feb. 9, 2018, with exceptions for certain provisions. However, the current statute does not encompass changes from the Tax Cuts and Jobs Act beyond those affecting 2017 returns. As a result, Virginia taxpayers have been unable to plan for their 2018 returns.
What are the scenarios in which conformity is passed?
Conformity could take effect through its inclusion in the budget bill. The earliest this would happen is mid-late April, after the reconvened session and completed budget negotiation process. This is the most likely outcome.
Conformity bills pass in their current form (without emergency clause) and take effect on July 1, 2019.
Negotiations continue and emergency clauses are added back to at least one of the bills either through the conference process or a governor’s amendment, and the bills pass with the requisite 80 percent vote. The earliest this would likely happen is late February – early March. This is the least likely outcome.
Given the current happenings in the VA state legislature, it seems unlikely that Scenario 3 will happen. If no emergency legislation is passed, and conformity is added to the budget bill, the earliest we can expect conformity is mid-April. This would cause significant, widespread delays in the ability to file returns and as well as slow down any refunds. A lack of conformity would require the Virginia Department of Taxation and tax software companies to make significant programming changes to their software systems, making filings much more complicated and placing extra burdens on taxpayers, tax practitioners and software developers.
Furthermore, a large number of adjustments would be required on state tax returns — as many as 20 for an individual return and 30 for a business return. These adjustments could result in additional fees, due to either separating the federal return from the state return or the need for an extension. In short, not passing tax conformity could lead to any number of complicating factors, all of which would increase the complexity, delay and, potentially, the cost of filing your tax return.
How does tax conformity affect tax reform?
Tax reform refers to changes to rates, credits, deductions, brackets or other elements of tax policy. These are important issues, but reform will be extremely difficult if Virginia does not start from a place of conformity.
Why is it important to separate conformity legislation from tax reform legislation?
In order to take effect ahead of Virginia’s May 1 filing deadline, conformity must be passed as emergency legislation, which requires an 80 percent approval vote in each chamber of the General Assembly. It is unlikely that any tax policy reforms can attain that 80 percent approval rate, so any tax policy provisions included in the conformity bill will jeopardize its passage. Additionally, without conformity attached, there’s no need for policy changes to contain an emergency clause, allowing such changes to be accomplished through a simple majority vote.
What about itemized v. standard deductions?
The discussion about itemized deductions is complicated. Currently, Virginia law requires that taxpayers who itemize on their federal return must also itemize on their state return. The same holds true for taxpayers who take the standard deduction; they must do the same on both returns. In addition to doubling the federal standard deduction, the TCJA also disallowed and/or modified the eligible amounts of various itemized deductions. Because Virginia sets its own standard deduction amount and it’s not tied to conformity, Virginia’s standard deduction does not automatically go up without legislation to increase it.
Many taxpayers who previously itemized are expected to find it more beneficial to take the federal standard deduction, which MAY cause an increase in state tax liability. However, in most of these cases, the federal savings are expected to exceed the additional state taxes due.
It is unlikely that Virginia will allow taxpayers to itemize even if they take the standard deduction on the federal return. One of the primary reasons for this is that it would be extremely difficult to estimate the fiscal impact of doing so and there is concern that it would create a revenue shortfall, causing cuts to Virginia’s budget. Many of the other policy ideas currently under discussion have a far more predictable fiscal impact.