3 Virginia Tax Breaks That You Don't Want to Miss
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Virginia's top state income tax rate of 5.75% is toward the lower end of states that have an income tax, but with the maximum rate applied to all taxable income above $17,000, it's fair to say that most people will pay this rate. Fortunately, there are several Virginia-specific tax breaks that can save you money, and here are three you definitely don't want to miss.
A double tax benefit for college savings
An excellent way for Americans to save for college expenses is a 529 savings plan. As I've written before, these plans work like a Roth IRA in the sense that contributions are not deductible on the federal level, but any qualified withdrawals are tax-free.
Some states offer additional tax incentives for 529 savers, and Virginia happens to be one of them. The Virginia529 inVEST plan allows contributions of up to $4,000 per account, per year to be excluded from the contributor's Virginia income. This gives participants a double tax benefit, with a deduction on some of their contributions and tax-free withdrawals for qualifying expenses.
Virginia's 529 plan has some rather attractive features in addition to the tax benefits. For starters, its $500,000 account limit is among the most generous in the country and should take care of four years' worth of expenses at pretty much any college in the U.S. Additionally, the plan's investment options have relatively low expense ratios in the range of 0.04% to 0.67% and a management fee of just 0.10%, so more of your investment gains stay in your account.
Long-term care insurance
Virginia offered a tax credit for long-term care insurance premiums, but it was repealed in 2013. Fortunately, these expenses are still deductible from your federal adjusted gross income (AGI) for Virginia state tax purposes.
To be eligible for the deduction, the expenses in question must not have already been claimed as a deduction on your federal tax return. Long-term care insurance premiums are considered a medical expense, and all taxpayers who itemize can deduct medical expenses in excess of 10% of their AGI (7.5% if over 65). At Virginia's top tax rate, this implies a discount of $57.50 for every $1,000 in long-term care insurance premiums paid, for most taxpayers.
As I've written before, long-term care insurance can be a great idea to protect your retirement savings, even before any tax incentives.
Child and dependent care
If you were eligible to claim a credit for child and dependent care expenses on your federal tax return, you are also eligible to deduct those expenses on your Virginia state tax return. The limits for the deduction are the same as the limits for the credit -- $3,000 for one dependent, and $6,000 for two or more.
Here's an overview of the federal Child and Dependent Care Tax Credit and its eligibility requirements, but in a nutshell, the credit is worth 20% to 35% of your qualified expenses, up to the limits. To be eligible, the child must be under 13 years old, and you must be working, looking for work, or attending school full-time while the expenses were incurred.
One potential mistake to avoid is entering the federal credit amount on your Virginia return instead of your actual child care expenses. For example, if your federal credit is 20% of $3,000 in expenses, this translates to $600. However, be sure to enter the $3,000 on your Virginia tax return, not $600. Doing so could cost you over $100 in Virginia taxes you shouldn't have to pay.
Take advantage
These tax breaks can be pretty lucrative, so be sure to take advantage. This is especially true if you have been saving for your child's education in another type of account, or have been putting off getting long-term care insurance. By saving in a 529 plan and taking advantage of the long-term care and child and dependent care deductions, you could put hundreds of dollars back in your pocket every year.
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