How Does Virginia Tax Retirement Income?

Virginia taxes retirement income, but provides deductions and exemptions that can reduce a retiree’s tax burden. These provisions offer tax relief while maintaining a broad tax base. Understanding these rules is important for financial planning.

Taxable Retirement Income Sources

Virginia’s tax structure includes most retirement income sources in its taxable base. Distributions from traditional individual retirement accounts (IRAs), 401(k)s, and 403(b)s are subject to Virginia income tax. This also applies to income from various private or government-sponsored pension plans, including those from other states. Annuity payments are taxable to the extent they represent earnings, not a return of principal.

However, certain retirement income streams receive favorable tax treatment. Social Security benefits are not taxed by Virginia. If any portion of Social Security benefits is taxed at the federal level, that amount can be subtracted on the Virginia tax return. Qualified distributions from Roth IRAs and Roth 401(k)s are also not taxed in Virginia, provided federal requirements for qualified distributions are met. Contributions to these accounts, made with after-tax dollars, and their earnings can be withdrawn tax-free.

Virginia Deductions and Exemptions for Retirement Income

Virginia offers specific deductions and subtractions that can significantly lower the taxable amount of retirement income. The age deduction benefits older residents. Taxpayers aged 65 and older may qualify for an income tax deduction of up to $12,000. The exact amount depends on the taxpayer’s birth date and income level. For instance, individuals born on or before January 1, 1939, can subtract $12,000, while for those born after this date, the deduction is income-based.

This age deduction is reduced dollar-for-dollar for single taxpayers when their adjusted federal adjusted gross income (AFAGI) exceeds $50,000. For married taxpayers, the $12,000 deduction for each spouse is reduced if their joint AFAGI surpasses $75,000. This deduction applies to all income, not just retirement income. If a retiree’s total retirement income is less than the $12,000 deduction, it can effectively be tax-free.

Military retirees may benefit from the Military Benefits Subtraction. For the 2024 tax year, eligible military retirees can subtract up to $30,000 of their military retirement income from their Virginia taxable income. This subtraction is scheduled to increase to $40,000 for the 2025 tax year and beyond. Effective in 2024, the age 55 requirement for this subtraction was removed, making all military retirees eligible regardless of age. This subtraction applies only to military retirement income included in federal adjusted gross income.

Virginia’s tax calculations begin with a taxpayer’s federal Adjusted Gross Income (AGI). State-specific deductions, such as the age deduction and military benefits subtraction, are then applied to this federal AGI. Tier 1 Railroad Retirement benefits also receive similar treatment to Social Security and can be subtracted if taxed at the federal level.

Reporting and Paying Virginia Tax on Retirement Income

Reporting taxable retirement income to Virginia involves specific forms and procedures. Virginia residents use Form 760, the Virginia Resident Individual Income Tax Return, to report income and calculate state tax liability. Part-year residents file Form 760PY. Taxable retirement income, including distributions from traditional IRAs, 401(k)s, pensions, and annuities, should be reported on this form.

To claim deductions and exemptions, such as the age deduction or the military benefits subtraction, taxpayers use specific schedules that accompany Form 760. For instance, adjustments to income, including these subtractions, are reported on Schedule ADJ. Taxpayers must ensure they meet eligibility criteria and accurately report the amounts.

Once the tax return is completed, any tax due can be paid through various methods. Options include online payment portals provided by the Virginia Department of Taxation or mailing a check with the tax return. If a significant portion of a retiree’s income is not subject to withholding, such as from pension payments or large IRA distributions, estimated tax payments may be required throughout the year to avoid penalties. The due date for filing Form 760 is May 1st of the following year, with extensions available for filing, though payment of taxes due is still required by the original deadline.