A retirement compass illustrating the Virginia tax implications.

Virginia Retirement Tax: Essential Facts and Guidelines

Located in the heart of the East Coast, Virginia offers retirees a friendly environment to live out their golden years. With a diverse mix of suburbs, small towns, and historic cities, it’s a place that suits the retirement lifestyle while offering many attractions to enjoy. For those nearing the end of their careers, one of the most important aspects to consider when moving to Virginia is the state’s tax structure and how it affects their retirement income.

Virginia’s tax system is reasonably accommodating and retirement-friendly due to its relatively low tax rates. Social Security benefits are not taxed in the state, which allows seniors to keep more of their retirement income. For other types of retirement income like pension income and retirement account withdrawals, Virginia offers deductions up to $12,000, easing the impact of income tax on their retirement funds.

In addition, Virginia also boasts low sales and property taxes compared to most other states. The state’s tax policies work together to reduce the overall tax burden on retirees, making it an attractive destination for those seeking a financially comfortable retirement. However, one should consult with a tax professional to fully understand their tax situation before committing to a move or making any decisions. You want to avoid needing to pay tax on an unexpectedly high bill.

Understanding Virginia Retirement Tax

Basics of Virginia Tax Law

Virginia taxes are very reasonable for those looking to retire. For instance, Social Security retirement benefits are not taxed in Virginia. The state also has deductions for other types of retirement income, such as pensions and retirement-account withdrawals.

Seniors can take advantage of a deductible amount of up to $12,000, depending on their age and income. This subtraction reduces the amount of their income subject to Virginia’s income tax source.

Virginia Income Tax Rate

Virginia has a progressive income tax system with rates that range from 2% to 5.75%. Residents with lower taxable income tend to less of their income in taxes, while those with higher taxable income pay a more significant percentage.

People age 65 and older may qualify for a tax deduction of up to $12,000, with the amount decreasing if their adjusted gross income (AGI) exceeds certain limits source.

Sales Tax Rate

Sales taxes in Virginia are relatively low, with a statewide rate of 5.3%. The rate comprises a 4.3% state sales tax and a 1% local sales tax. There may be additional local sales taxes in some areas, but these rates remain comparatively modest compared to other states. The lower sales tax rate can benefit retirees who may be subject to tighter budgets during their retirement years.

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Income and Retirement in Virginia

Retirement Income Implications

In Virginia, the state offers qualifying individuals aged 65 and older a subtraction that reduces their income subject to state income tax. For those born on January 1, 1939, or earlier, a subtraction of $12,000 is available. If born on January 2, 1939, or later, the amount of allowed subtraction depends on the individual’s income 1.

Social Security Retirement Benefits

Virginia does not tax Social Security retirement benefits, which is a financial relief to many retirees in the state 2. This absence of taxes on Social Security income can significantly influence a retiree’s financial planning and aid in sustaining their retirement funds throughout their golden years.

401(k) and 403(b)

Individuals will generally consider various financial vehicles, such as 401(k) and 403(b) plans, when planning for retirement. In Virginia, withdrawals from these accounts are deductible up to $12,000 for seniors; offering added financial incentives to retirees in the state 2.

This is especially helpful in managing tax implications on retirement income and ensuring retirees have a reliable source of financial support during their retirement years.

Footnotes

  1. https://www.tax.virginia.gov/news/virginia-taxes-and-your-retirement
  2. https://smartasset.com/retirement/virginia-retirement-taxes ↩ ↩2 ↩3

State Taxes and Deductions

State Income Taxes

In Virginia, retirees enjoy various tax benefits that make the state tax-friendly. The state fully exempts all Social Security income from its income tax. Moreover, Virginia offers qualifying individuals aged 65 and older a subtraction that reduces their income subject to state income tax. If a retiree was born on January 1, 1939, or earlier, they can subtract $12,000. For those born on January 2, 1939, or later, the allowed subtraction is based on the retiree’s income.

As of July 1, 2022, the standard deduction for Virginia individual income tax returns has increased to $8,000 for single filers and $16,000 for married couples filing jointly, provided specific revenue targets are met. If the targets are not reached, the deduction will increase to $7,500 and $15,000, respectively.

Property Taxes

Property taxes in Virginia vary depending on location and are based on the property’s assessed value. Although the state does not offer a specific property tax break for retirees, some localities and counties may provide relief measures, such as tax deferral for seniors or disabled residents. It is essential to research the specific property tax regulations in the locality where one resides.

Tax Withholding and Payments

Income Tax Withholding

In Virginia, your retirement benefit is generally subject to federal and state income taxes. To manage your tax withholdings, consider submitting a request for income tax withholding. If you receive income from other sources not subject to Virginia income tax withholding, it’s advisable to either make estimated tax payments on Form 760ES or request an additional amount of tax to be withheld from your pension or annuity payment. People aged 65+ may qualify for a subtraction reducing their income subject to the Virginia income tax. 

For Virginia retirees, it is vital to be aware of the state’s income tax brackets. The tax rates range from a low of 2% on taxable income up to $500 for single filers and $1,000 for joint filers to a high of 5% on taxable income exceeding $3,000 for single filers and $6,000 for joint filers, according to Kiplinger.

Direct Deposit

To make benefit payments more convenient, consider enrolling in direct deposit. Authorization for direct deposit of monthly benefit payments ensures you receive your funds promptly and securely. This savings move is particularly advantageous for retirees, as it eliminates the risks of lost or stolen checks, postal delays, and the need to wait for check clearance. Direct deposit is a reliable and efficient way to manage your retirement benefits and tax withheld payments.

Retirement Benefits in Virginia

VRS Retirement Benefits

Virginia Retirement System (VRS) offers a range of benefits to retirees. These include retirement income, basic group life insurance, and the ability to designate a beneficiary. The VRS pension is a defined benefit plan, which means that the retirement benefit is calculated with a formula considering factors like service credit, average final compensation, and a retirement multiplier.

To be eligible for VRS retirement benefits, individuals must fulfill certain age and service credit requirements. VRS offers two ways to reach normal retirement age: the Rule of 90, where the member’s age plus their service credit equals 90, and the age-based method, where a member reaches 65 with at least five years of service credit or 50 with at least 30 years of service credit.

When retirees receive their VRS pension, they can take a one-time, partial lump-sum payment and a reduced monthly life benefit. Additionally, retirees can choose from several survivor benefit options to ensure financial security for their beneficiaries in the event of their death.

Military Retirement Income

In Virginia, military retirement income is treated differently than other retirement income. Virginia does not tax income received by those who retired from the United States Armed Forces or the Virginia National Guard. This tax exemption applies to both regular retirement pay and disability retirement pay.

Military retirees who have not yet reached retirement age under the VRS may be able to purchase service credit for their military service. This can increase their VRS retirement benefits and allow them to retire earlier. They must apply and make a one-time purchase payment within a specified time frame to do this.

Virginia also offers a tax break for certain military retirees using the myVRS income tax tool. This tool allows military retirees to calculate and submit tax withholding changes online. This convenient feature can help them manage their taxes more efficiently and ensure they receive the appropriate deductions on their retirement income.

Pension and Distributions

Pension Income

In Virginia, Social Security retirement benefits are not taxed. However, other types of retirement income, such as pension income, are subject to taxes but with some deductions. For seniors in Virginia, pension income can be deductible up to $12,000 source. This means qualifying individuals aged 65 and above can reduce the amount of their retirement income subject to state income tax based on their income and birth date source.

The state’s income tax brackets are as follows:

  • 2% for $0 to $3,000 of taxable income
  • 3% for $3,000 to $5,000 of taxable income
  • 5% for $5,000 to $17,000 of taxable income
  • 5.75% for $17,000+ of taxable income source

SEP and IRA Distributions

Virginia has similar tax treatment regarding Simplified Employee Pension (SEP) and Individual Retirement Account (IRA) distributions. Traditional and Roth IRAs are subject to the same deductible and tax brackets mentioned in the Pension Income section.

For Traditional IRAs, the distributions are generally considered taxable income. However, Virginia allows for a deduction up to $12,000, depending on the retiree’s age and income source.

On the other hand, qualified Roth IRA withdrawals are tax-free since the contributions are made after tax. Retirees taking distributions from their Roth IRA in Virginia can enjoy the same deductible possibilities if they meet the age and income criteria.

When it comes to payout options, retirees with pensions or other retirement plans have several choices. One standard option is the partial lump-sum option payment (PLOP), where the retiree receives part of their retirement benefits at once with the remainder as a monthly annuity. The tax implications for a PLOP will vary depending on the retiree’s total income and the amount they choose to receive as a lump sum.

Tax Relief and Exemptions

Age Deduction

In Virginia, qualifying individuals aged 65 and older can benefit from a subtraction that reduces the amount of income subject to Virginia income tax. For those born on January 1, 1939, or earlier, a $12,000 deduction is available. The allowed amount for individuals born on January 2, 1939, or later, is based on income levels. Additionally, Virginia exempts all Social Security income from the state income tax.

Spouse and Dependent Exemptions

Beginning with the 2022 tax year, the standard deduction for Virginia individual income tax is set to increase, provided that certain revenue targets are met. If the targets are met, the standard will be raised to $8,000 for single filers and $16,000 for married couples filing jointly. If the targets are not met, the it will increase to $7,500 and $15,000, respectively.

Property Tax Relief

Older Virginians aged 65 and over, as well as Virginians with disabilities, may be eligible for property tax relief in most Virginia cities and counties. This relief can lower the amount of property tax owed on a primary residence. Additionally, individuals in these categories may qualify for other personal exemptions or deductions on their Virginia state returns.

Retirement Planning and Taxes

In the state of Virginia, retirement planning and taxes go hand-in-hand. To ensure a secure retirement, one must understand their tax liability and weigh different retirement benefit options. By making informed decisions, retirees can optimize their retirement income and minimize tax liabilities.

Tax Liability Assessment

When preparing for retirement in Virginia, it is crucial to assess your tax liability. Understanding your tax obligations can help you plan for a more secure financial future. Virginia retirees should be aware of the following taxes:

  • Income Taxes: Virginia imposes a state income tax on taxable income ranging from 2% to 5%. This tax affects traditional pension plans and withdrawals from retirement accounts like 401(k)s and IRAs.
  • Retirement Benefit Taxes: The Virginia Retirement System states that pension benefits might be subject to federal and state income taxes, depending on individual circumstances. Retirees will receive a 1099-R form, which is used to report retirement benefits on tax returns.

To assess your tax liability accurately, consider consulting with a tax professional or financial advisor experienced in Virginia retirement tax laws.

Retirement Benefit Options

Retirees in Virginia have several options for selecting their retirement benefits. These primarily include the defined benefit plan and the survivor option, both of which impact a retiree’s tax liability and financial security.

  • Defined Benefit Plan: This traditional pension plan offers a lifetime monthly benefit based on a retiree’s years of service, age, and compensation. In Virginia, the defined benefit plan’s taxable portion will depend on federal and state income tax laws, as mentioned earlier.
  • Survivor Option: This option allows a retiree to select a reduced pension benefit while ensuring that their surviving spouse will continue to receive a pension payment after the retiree’s death. The survivor option can affect the retiree’s monthly pension benefit amount and the survivor’s tax liability.

When considering these retirement benefit options, evaluating how each choice will impact your overall tax burden and long-term financial security is essential. Retirees need to weigh the benefits and drawbacks of each approach while determining which option best suits their financial goals and needs.

Divorce and Retirement in Virginia

Impact on Retirement Benefits

Divorce in Virginia can have a significant impact on retirement benefits. In most cases, retirement accounts are considered marital property and are subject to division during the divorce process. The Virginia Retirement System (VRS) oversees the distribution of retirement benefits and provides various payout options in the event of a divorce. Many of the details are dependant on factors such as the length of the marriage, the type of retirement account, and the terms of the divorce agreement,

Approved Domestic Relations Order

An Approved Domestic Relations Order (ADRO) is a court order that specifies how retirement benefits will be divided among the divorcing parties[^3^]. In Virginia, an ADRO is required to split the retirement accounts during a divorce properly. Approval of the ADRO by both the court and VRS ensures the correct distribution of retirement benefits according to the divorce agreement.

The ADRO outlines the specific rights and obligations of each spouse concerning the retirement accounts, such as the percentage of benefits to be received by each party and the payment method[^4^]. Both parties must adhere to the terms outlined in the ADRO to ensure a fair and accurate division of the retirement benefits during and after the divorce process.

Comparing Taxes in Virginia and Other States

State Income Tax Comparisons

In Virginia, seniors who rely solely on Social Security and have other retirement income totaling less than $12,000 do not need to pay state taxes on retirement income. This is quite a favorable scenario when comparing Virginia to certain other states1. As of 2023, eleven states do not tax regular or retirement income, including Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming2. On the other end of the spectrum, New Hampshire imposes a 5% tax on some retirement benefits2.

Property Tax Comparisons

When it comes to property taxes, senior homeowners in Virginia benefit from low rates, making it an attractive state for retirees. The average state and local sales tax rate in Virginia sits at around 5.63%, which is among the lowest in the U.S1. In contrast, states like Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax at all, but Alaska allows local governments to charge local sales taxes3. Meanwhile, other states, such as Hawaii and Wyoming, also have low combined average sales tax rates at 4.44% and 5.33% respectively3.

It’s essential to consider multiple factors at state level such as state income taxes, property taxes, and federal income taxes when comparing retirement tax scenarios across states.

Need professional assistance with your personal taxes?

Our team of experienced CPAs is here to help! Request a quote today and let us handle your tax needs with expertise and personalized solutions.

Footnotes

  1. SmartAsset ↩ ↩2
  2. Retirement Living ↩ ↩2
  3. MoneyCrashers ↩ ↩2

Basic Information Requirements

Name and Address Declaration

When filing for retirement taxes in Virginia, it is crucial to declare your name and address accurately. The state requires this information to effectively administer tax collection and ensure retirees’ benefits are correctly calculated. Be sure to double-check the name and address information on your tax forms, as any discrepancies may cause delays or required adjustments in the processing of your retirement taxes.

Request for Income Tax Withholding

In Virginia, retirees may need to consider income tax withholding on their retirement benefits. To do this, you should fill out the appropriate tax withholding forms. These forms help determine the amount of tax to be withheld from your retirement income, ensuring you meet your tax obligations without underpayment or overpayment concerns.

In Virginia, Social Security benefits are not taxed, while other types of retirement income, such as pensions and retirement account withdrawals, may be deductible up to $12,000 for seniors, depending on your eligibility.

Carefully evaluate your retirement income sources and the tax rules that apply to each. This way, you’ll be better prepared to manage your retirement taxes in Virginia with a confident, knowledgeable, and straightforward approach.

Frequently Asked Questions

Does Virginia tax Social Security benefits?

Virginia does not tax Social Security benefits, making it a tax-friendly state for retirees who rely on this income source.

Are IRA distributions taxed in Virginia?

Traditional IRA distributions are generally taxable, but Virginia allows a deduction of up to $12,000 for seniors, depending on factors like age, filing status, and income source. Roth IRAs follow different rules, as contributions are made with after-tax dollars, so qualified distributions are usually not subject to state taxes.

How are federal pensions taxed in Virginia?

Federal pensions, like other forms of retirement income, may be subject to taxes in Virginia. However, eligible taxpayers can take advantage of the Age Deduction, allowing a deduction of up to $12,000 source.

Are retirement pensions subject to taxes in Virginia?

Yes, retirement pensions are subject to taxes in Virginia. The state offers an Age Deduction of up to $12,000 for qualified individuals source. This helps to reduce the tax burden on seniors with pension income.

Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult a tax, legal and accounting advisors before engaging in any transaction or submitting any IRS form.
Picture of Ramin Mohammad

Ramin Mohammad

Ramin Mohammad is a lawyer and CPA with over 15 years of experience including working in audits, teaching, and in big law. Ramin helps clients on both personal and business related tax issues ranging from a multitude of practice areas including tax structuring, planning and cross jurisdictional taxes. His client-base expands throughout the US and overseas offering tax consulting, tax planning and tax preparation.

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