Under legislation enacted by the General Assembly, Virginia's date of conformity to the federal tax code will advance to December 31, 2021. See Tax Bulletin 22-1 for more information.
In addition to the subtractions listed below, Virginia law also provides several deductions that may reduce your tax liability.
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 certain types of income that may have been reported in FAGI. Those items, listed below, should be subtracted when computing VTI.
If you or your spouse were born on or before Jan. 1, 1956, you may qualify to claim an age deduction of up to $12,000 each. The age deduction you may claim will depend upon your birth date, filing status, and income. If you were born:
- On or before Jan. 1, 1939: You may claim an age deduction of $12,000. If you are married, each spouse born on or before Jan. 1, 1939 may claim a $12,000 age deduction. For individuals born after Jan. 1, 1939, the age deduction is based on the criteria below.
- On or between Jan. 2, 1939, and Jan. 1, 1956: Your age deduction is based on your income. A taxpayer's income, for purposes of determining an income-based age deduction, is the taxpayer's adjusted federal adjusted gross income or AFAGI. A taxpayer's AFAGI is the taxpayer's federal adjusted gross income, modified for any fixed-date conformity adjustments, and reduced by any taxable Social Security and Tier 1 Railroad Benefits.
This deduction shall be reduced by $1 for every $1 that the taxpayer's adjusted federal adjusted gross income exceeds $50,000 for single taxpayers or $75,000 for married taxpayers. For married taxpayers filing separately, the deduction will be reduced by $1 for every $1 the total combined adjusted federal adjusted gross income of both spouses exceeds $75,000. You may not claim the age deduction if you claim the Disability Income subtraction.
For details on how to compute, see the Age Deduction Calculator.
Virginia law exempts Social Security and Tier 1 Railroad Retirement benefits from taxation. If you were required to include any of your benefits in federal adjusted gross income, subtract that amount on your Virginia return. Do not include Tier 2 Railroad Retirement Benefits and Other Railroad Retirement and Railroad Unemployment Benefits. For subtracting other benefits, see Tier 2 and other Railroad Retirement and Railroad Unemployment Benefits.
Virginia law allows a subtraction for the amount of any state income tax refund or overpayment credit included in federal adjusted gross income. The subtraction is the amount of refund or credit you reported on your federal return.
Virginia law allows a subtraction for income (interest) derived from obligations or income (dividends and gains) derived from the sale or exchange of obligations of the United States, and on obligations or securities of any authority, commission or instrumentality of the United States to the extent the income is included in federal adjusted gross income. The amount to be subtracted is the income less any related expenses already deducted on the federal return. The subtraction applies only to income from direct obligations. For information on obligations that qualify for the subtraction, see PD 94-281.
Up to $20,000 of disability income as defined by the Internal Revenue Code Section 22 (C ) (2) (B) (iii) can be subtracted when calculating Virginia taxable income. As defined under federal law, the subtraction applies to income received for permanent and total disability. The subtraction is equal to the amount of income received for total or permanent disability, not to exceed $20,000. You may not claim this subtraction if you claim the Age Deduction for Taxpayers Age 65 and Over.
If interest on a Virginia state or municipal obligation or gains from sales of those obligations must be included in federal adjusted gross income, the income may be subtracted in computing Virginia taxable income. The amount to be subtracted is the amount of income included in federal adjusted gross income, less related expenses deducted on the federal return. For information on obligations that qualify for the subtraction, see PD 94-281.
Federal law allows a credit for wages paid to certain employees. If the credit is claimed, those wages cannot be deducted as an expense on the federal income tax return. Virginia law does not provide a corresponding credit, but allows a subtraction for the wages that were not deductible on the federal return. The amount to be subtracted is the amount of wages or salaries eligible for the federal work opportunity tax credit that were not deducted for federal income tax purposes. Do not enter the federal credit amount.
Federal and Virginia law exempt Tier 2 vested dual benefits, as well as certain other Railroad Retirement Act benefits and Railroad Unemployment Insurance benefits from income tax. The amount to be subtracted is the benefit amount that was included in federal adjusted gross income as a taxable pension or annuity, and that was not already deducted on your federal return.
Any Virginia Lottery prize of less than $600 that has been included in federal adjusted gross income may be subtracted on the Virginia return. If more than one prize has been received, each prize of less than $600 may be subtracted
Enter the amount of wages or salaries for active and inactive service in the National Guard of the Commonwealth of Virginia for persons of rank O3 and below included in federal adjusted gross income. This amount may not exceed the amount of income received for 39 days or $3,000, whichever is less. Reminder: This subtraction does not apply to members of the active or reserve units of the Army, Navy, Air Force or Marines, or the National Guard of other states or the District of Columbia. If you claim this subtraction, you cannot claim a Credit for Low-Income Individuals or Virginia Earned Income Credit.
A subtraction can be claimed for all military pay and allowances attributable to service in a combat zone or qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. Virginia's conformity with federal law allows the exclusion of certain military pay associated with duty in combat zones and hazardous duty areas as provided under the Internal Revenue Code. The amount of the Virginia subtraction is the portion of an officer's pay that is not currently excluded from federal adjusted gross income under the Internal Revenue Code provisions.
A Virginia subtraction is allowed for individuals who receive distributions from retirement plans. The subtraction can be taken only if the individual was taxed on contributions originally made to the retirement plan in another state that were deductible from federal adjusted gross income during the same period. The subtraction applies to qualifying distributions from a qualified pension, stock bonus or profit-sharing plan as described by IRC Section 401, an individual retirement account or annuity established under IRC Section 408, a deferred compensation plan as defined by IRC Section 457, or a federal government retirement program. Conditions for Qualification:
- Contributions must have been made to an IRS Qualified Plan;
- The contributions must have been deductible for federal income tax purposes; and
- The contributions must have been subject to income tax in another state.
Income that is included in federal adjusted gross income that is attributable to a distribution of benefits or a refund from the Virginia College Savings Plan (previously called the Virginia Higher Education Tuition Trust Fund,) or ABLENow may be entered as a Virginia subtraction. The subtraction for any income attributable to a refund is limited to the amount of income attributable to a refund in the event of a beneficiary's death, disability, or receipt of scholarship.
Unemployment benefits received during the taxable year and included in federal adjusted gross income may be subtracted on the Virginia return. The amount of the subtraction is the amount of unemployment benefits that were included on your federal return.
Up to $15,000 of military basic pay received during the taxable year may be exempted from Virginia income tax. The subtraction is reduced when military pay exceeds $15,000 and is fully phased out when pay reaches $30,000 (i.e., for every dollar that military basic pay exceeds $15,000, the subtraction is reduced by one dollar). Military personnel must serve on active duty for 90 days or more, and can be stationed inside or outside of Virginia.
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.
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.
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.
Virginia law requires certain subtractions from income as the result of fixed date conformity provisions.
Effective for taxable years beginning on or after Jan. 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.
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.
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.
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.
You may subtract any income attributable to a first-time home buyer savings account if you meet certain criteria. Find out more by visiting our First Time Home Buyer Savings Account Subtraction page.
Effective for taxable years beginning on and after Jan. 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.
If your real property is taken by the federal, state or local government, and the compensation you receive results in a gain that’s included in your federal adjusted gross income, you can subtract that gain on your Virginia return.
Income related to a federal partnership audit may be subtracted from Virginia taxable income if the income was previously reported on the owner’s Virginia return. The amount of the subtraction is equal to the federal taxable income that was included in the owner’s Virginia original income tax return but should not have been reported. When claiming this subtraction, include a copy of the partnership’s Form 502FED-1.
Investments in a certified Virginia real estate investment trust (REIT) made between January 1, 2019 and December 31, 2024 may be eligible for an income tax subtraction.
To be certified as a Virginia REIT, the trust must:
- be organized as a real estate investment trust
- invest at least 90% of its fund in Virginia
- invest at least 40% of its funds in areas where the annual unemployment rates, poverty rates, or both, are greater than the statewide average, based on the most recent year for which data is available.
You can't claim this subtraction if:
- the trust is managed by a family member or affiliate
- you claimed one of the following for the same investment
- long-term capital gains subtraction
- Virginia venture capital investment subtraction
- qualified equity and subordinated debt investment credit.
Registering and certifying a Virginia REIT
- Prior to investing, submit Form REIT-1 to register the REIT with Virginia Tax.
- Once the investment is made, submit Form REIT-2 to certify the trust as a Virginia REIT.
- Then submit Form REIT-3 to provide investor information.
All 3 forms are due by January 31 of the year after the investment is made (e.g. if the investment is made during 2019, the forms are due by January 31, 2020). All 3 forms must be submitted before investors can claim the subtraction.
The trust will receive a letter from us after the trust is certified. Certification expires after 1 year.
Claiming the subtraction on your Virginia income tax return
Complete the schedule of adjustments that is appropriate for your return type, and be sure to enter the certification number provided by the trust.
If taxpayers have income attributable to an investment in a certified Virginia venture capital account made on or after Jan. 1, 2018, but before Dec. 31, 2023, they can claim an individual or corporate income tax subtraction. To qualify, Virginia Tax must certify the venture capital account prior to the investment being made.
To be certified as a Virginia venture capital account, an investment fund must employ at least one investor with 4 years of professional experience in venture capital investment, or substantially similar experience, and invest at least 50% of its investments in qualified portfolio companies that:
- Have their primary business location in Virginia;
- Engage primarily in the production, sale, research, or development of a product or service other than management or investment of capital; and
- Provide equity in the company to the venture capital account in exchange for a capital investment.
An individual or sole proprietorship cannot be a qualified portfolio company.
Registering and certifying a Virginia venture capital account
Prior to investing, the operator of the investment fund should submit Form VEN-1 to register the venture capital account with Virginia Tax. Once the investment has been made, the operator of the investment fund can submit Form VEN-2 to get the venture capital account certified in the state as a Virginia venture capital account.
The operator of the fund will receive a certification letter from Virginia Tax after the fund is certified. The operator of the fund then has to provide a copy of that letter to investors so they can claim the subtraction on their income tax returns.
Next, submit Form VEN-3 to provide investor information to Virginia Tax. Investors cannot claim this subtraction unless the investor is included on Form VEN-3. Certification is for one year; venture capital accounts must recertify annually.
For more information, please see Instructions for Virginia Venture Capital Account Investment Fund Registration and Certification Forms.
Claiming the subtraction on your Virginia income tax return
Complete the schedule of adjustments that is appropriate for the return type, and be sure to enter the certification number provided by the investment fund operator.
You cannot use the same investment for a Qualified Equity or Subordinated Debt Credit, or a subtraction for long-term capital gains. Investments do not qualify if they were made in a company owned or operated by an affiliate or a family member of the taxpayer.