Does Virginia Tax 401k Distributions?
Virginia generally treats 401(k) withdrawals as taxable income, but a key state provision allows many retirees to reduce their overall tax liability.
Yes, Virginia taxes distributions from 401(k) plans by treating withdrawals from retirement accounts as taxable income, similar to wages or other earnings. A tax benefit, known as the age deduction, is available for many retirees. This deduction can reduce or even eliminate the state tax on these distributions for qualifying individuals.
Virginia’s General Taxation of Retirement Income
Virginia’s approach to taxing retirement income begins with the federal adjusted gross income (FAGI) from your federal tax return. Distributions from traditional 401(k) plans, traditional IRAs, and most pensions are included in this initial income figure. The amount you withdraw is added to your Virginia Adjusted Gross Income (VAGI), which serves as the basis for calculating your state tax liability.
Unlike some states, Virginia does not exempt all retirement income from taxation. The system is designed to tax this income unless the taxpayer meets specific criteria for a deduction. This structure places the responsibility on the taxpayer to claim any available benefits to reduce their taxable income.
The Age Deduction for Taxpayers 65 and Older
Virginia law provides an age deduction of up to $12,000 that can be applied against any income, including distributions from a 401(k) plan. Eligibility and the rules for claiming the deduction depend on a taxpayer’s birth year. Taxpayers born on or before January 1, 1939, can claim the full $12,000 deduction without it being limited by their income. Taxpayers born between January 2, 1939, and January 1, 1961, may also claim a deduction of up to $12,000, but it is subject to an income-based limitation.
For those subject to the income limitation, the $12,000 deduction is reduced by $1 for every $1 that income exceeds $50,000 for single filers or $75,000 for married couples. This calculation uses your Adjusted Federal Adjusted Gross Income (AFAGI), which is your federal adjusted gross income minus any taxable Social Security or Tier 1 Railroad Retirement benefits.
When a married couple files a joint return, the deduction can be claimed by each spouse who meets the age requirement. If both spouses qualify, they can claim a total deduction of up to $24,000 ($12,000 each). Each spouse’s deduction is subject to the rules based on their individual birth year and the joint income limitation. If only one spouse qualifies, that spouse may claim a $12,000 deduction.
Calculating Your Taxable Distribution Amount
To determine the taxable portion of your 401(k) distribution, you must apply the age deduction after accounting for non-taxable income. Virginia does not tax Social Security benefits, so you should exclude any Social Security income from your calculations, as it is not part of your Virginia Adjusted Gross Income (VAGI).
Consider a single filer, born in 1958, who receives $20,000 from a 401(k) and $18,000 in Social Security benefits. The $18,000 of Social Security is ignored for Virginia tax purposes. The calculation then focuses on the $20,000 401(k) distribution. Since the individual qualifies by age, they are eligible for the $12,000 age deduction, assuming their income does not exceed the phase-out threshold.
You subtract the eligible age deduction from the total 401(k) distribution amount. In this example, the taxpayer would subtract their $12,000 age deduction from their $20,000 401(k) withdrawal. This leaves $8,000 as the amount of income that is subject to Virginia income tax.
Reporting on Your Virginia Tax Return
The primary form for Virginia residents is Form 760, the Virginia Resident Income Tax Return. The age deduction is not claimed directly on this main form but on a separate schedule that accompanies it. The specific form for this adjustment is Schedule ADJ.
On this schedule, you will find a line designated for the Age Deduction where you will enter the amount you are claiming, up to the $12,000 maximum per qualifying person. The total subtractions from Schedule ADJ, including the age deduction, are then transferred to the appropriate line on Form 760. This action reduces your Virginia Adjusted Gross Income, which in turn lowers your overall tax liability.