Virginia Subtractions From Income

Before you can calculate your tax amount, you must first determine your Virginia taxable income (VTI), upon which your tax is based. Federal adjusted gross income (FAGI) is the starting point for computing (VTI) on individual tax returns. Your FAGI is calculated on your federal individual tax return, which must be completed prior to filing your Virginia return. 

Virginia law exempts from income tax certain types of income that may have been reported in FAGI. Those items, listed below, should be subtracted when computing VTI. 

Virginia law also provides for a number of deductions in computing Virginia taxable income. Be sure to review those provisions before completing your income tax return.

Federal and State Employees

Federal and state employees whose total salary from all employment during the taxable year is $15,000 or less may subtract up to $15,000 of the salary received from a federal or state government job. Virginia employees working in universities, colleges and community colleges who are eligible for the subtraction include, but are not limited to: Virginia employees of state-supported institutions of higher education in the Commonwealth, and employees of publicly supported comprehensive community colleges. Federal employees who are not eligible for the subtraction include but are not limited to the following: Members of the active or reserve components of Army, Navy, Air Force, or Marines, National Guard of Virginia, any other state, or District of Columbia. Additionally, local government employees and United States Postal Service employees are not eligible for the subtraction. If the total salaries reported exceed $15,000, you may not claim the subtraction. For example, an individual who earned $10,000 in a federal or state government job and $15,000 in a private sector job during the taxable year 2005 would NOT be eligible for the subtraction. Unearned income, such as pensions and annuities, is not considered in determining eligibility for the subtraction. For example, an individual who received federal or state government wages of $14,000 and pension income of $35,000 during the taxable year WOULD be eligible to claim the subtraction. Report on Schedule ADJ, Line 6, Code 39. Code of Virginia Section 58.1-322 [C] [24]

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Income Received by Holocaust Victims

Individuals may claim a subtraction for income resulting from the return or replacement of assets stolen during the Holocaust and throughout the time period leading up to, during, and directly after World War II, if that income was included in federal adjusted gross income. The subtraction is the amount of income from the return or replacement of assets that has not been deducted or excluded from income on your federal return. Report on Schedule ADJ, Line 6, Code 40. Code of Virginia Section 58.1-322 [C] [28]

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Payments Made Under the Tobacco Settlement

Individuals and corporations may subtract income received as the result of payments from the Tobacco Master Settlement Agreement, or the National Tobacco Grower Settlement Trust. Report on Schedule ADJ, Line 6, Code 41. Code of Virginia Section 58.1-322 [C] [27]

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Medal of Honor Recipients

Military retirement income received by individuals awarded the Medal of Honor can be subtracted from federal gross income. The amount of the subtraction is the amount of military retirement benefits reported in federal adjusted gross income. The subtraction does not apply to benefits received by a surviving spouse. Report on Schedule ADJ, Line 6, Code 44. Code of Virginia Section 58.1-322 [C] [26]

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Fixed Date Conformity Subtractions

Virginia law requires certain subtractions from income as the result of fixed date conformity provisions. Report on Schedule ADJ, Line 6. Code of Virginia Section 58.1-301.

Military Death Gratuity Payments

Retroactive to taxable year 2001, survivors of military personnel killed in the line of duty may claim a subtraction for military death gratuity payments made after September 11, 2001, to the extent that the payments were included in federal adjusted gross income. Report on Schedule ADJ, Line 7, Code 46. Code of Virginia Section 58.1-322(C)(31).

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Subtraction for Certain Death Benefits

Effective for taxable years beginning on or after January 1, 2007, individuals may subtract death benefit payments received from an annuity contract to the extent that such payments are subject to federal income tax. Report on Schedule ADJ, Line 6, Code 49. .Code of Virginia Section 58.1-322(C)(32).

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Gains from Land Preservation

Gains from Land Preservation - To the extent an individual's federal gain includes gain or loss recognized on the sale or transfer of a Land Preservation Tax Credit, the individual is required to subtract the gain or add back the loss on their Virginia return. Report on Schedule ADJ, Line 6, Code 51.

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Long-Term Capital Gains

Income taxed as a long-term capital gain, or any income taxed as investment services partnership income for federal tax purposes is allowed as a subtraction provided the income is attributable to an investment in a "qualified business" as defined in Va. Code § 58.1-339.4 or in any other technology business approved by the Secretary of Technology. Qualified businesses include those related to advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, medical device technology, nanotechnology, or any similar technology related field. The business must have its principal facility in Virginia and less than $3 million in annual revenues for the fiscal year preceding the investment. The investment must be made between the dates of April 1, 2010, and June 30, 2020. Taxpayers claiming the Qualified Equity and Subordinated Debt Credit cannot claim this subtraction relating to investments in the same business. In addition, no investment is "qualified" for this deduction if the business performs research in Virginia on human embryonic stem cells. Report on Schedule ADJ, Line 6, Code 52. Code of Virginia Section 58.1-322(C)(35).

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Historic Rehabilitation

To the extent included in federal adjusted gross income, any amount of gain or income recognized by a taxpayer in connection with the Historic Rehabilitation Tax Credit is allowed as a subtraction on the Virginia return. 

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First-Time Home Buyer Savings Accounts

To the extent included in federal adjusted gross income, an individual may subtract any income attributable to a first-time home buyer savings account that was taxed as interest, capital gains, or other income for federal income tax purposes. 

Distributions from a first-time home buyer savings account may only be used for the purpose of paying or reimbursing the down payment and allowable closing costs for the purchase of a single-family residence in Virginia 22 by a qualified beneficiary. The subtractions claimed by an account holder in all prior taxable years are subject to recapture in the taxable year in which account funds are withdrawn for any other purpose. 

To claim the subtraction, an individual must designate an account as a first-time home buyer savings account. An individual may designate an account by submitting documentation with their Virginia income tax return for the first taxable year in which such individual claims the subtraction. An individual must submit separate documentation for each account that he or she is designating. The documentation must include the following information:

  • The name and address of the financial institution that maintains the account;
  • The names of any other individuals with an ownership interest in the account;
  • The account number or other account identifier;
  • The type of principal (cash or marketable securities) contributed to the account as of the last day of the taxable year;
  • The amount of any withdrawals from the account during the taxable year; and
  • The account beneficiary or beneficiaries.

After designating an account as a first-time home buyer savings account, the account holder is required to include documentation with updated information for the account for all future taxable years in which he or she is required to file a Virginia income tax return. If an account holder has designated more than one existing first-time home buyer savings account, the account holder is required to submit separate documentation with updated information for each account.

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Discharge of Student Loan

Effective for taxable years beginning on and after January 1, 2015, a subtraction is allowed for income attributable to the discharge of a student loan due to the student’s death. For purposes of this subtraction, “student loan” means the same as the term is defined under IRC § 108(f). 

This is a loan to an individual to assist that individual in attending an educational organization that was made by:

  • The United States, or an instrumentality or agency thereof;
  • A state, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof;
  • Certain tax-exempt public benefit corporations that have assumed control over a state, county, or municipal hospital and whose employees are deemed public employees under state law;
  • Charitable educational organizations, if the loan was made: pursuant to an agreement with one of the above listed entities; or pursuant to a program designed to encourage its students to serve in occupations or areas with unmet needs, and under which the services provided by the students are for or under the direction of a governmental unit or certain tax-exempt organizations. 

This subtraction is not applicable to the discharge of private loans. This subtraction does not apply to loans that are already excluded from federal income taxation. 

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Last Updated 01/10/2017 10:30