Presumably, all individuals that have significant Virginia income (or Virginia source income, for nonresidents) have discussed the federal limitation on itemized deductions for state income taxes. Briefly, this deduction is limited to $10,000 ($5000 for married filing separately) for tax years before 2025 and $40,000 ($20,000) for 2025 through 2029 (adjusted slightly higher each year). Many states, including Virginia, enacted laws that allowed pass-thru entities (“PTEs”, generally, tax partnerships and S corporations) to elect to pay Virginia taxes and to pass-through a credit to their owners for their proportionate share of such payments (a “PTET Regime”). An LLC is usually a tax partnership.
Some (especially those that are relying on AI) may have become discouraged that the Virginia PTET Regime was expiring on January 1, 2027 (with the out-of-state credit expiring on January 1, 2026). Not so. The Virginia PTET Regime has been permanently extended (at least, as much is ever permanent in government). The thirteenth enactment clause of the 2026 Amendments to the 2025 Appropriation Act (House Bill 29, Chapter 7) enacted February 20, 2026.
The impact of resident versus nonresident and Virginia PTET versus state income taxes from other states that may or may not have PTET Regimes is beyond the scope of this Current TET Thought. However, because the federal deduction limitation applies to an individual’s aggregate state income deduction, an individual who makes about $700,000 or more themselves (if unmarried) or on a joint return with their spouse should be consulting their tax advisor if a significant part of their income would be Virginia sourced from a PTE. The PTET Regime also applies to trusts and estates subject to income tax under Virginia Code Section 58.1-360.
For simplicity, this Current TET Thought uses $700,000 as the caution level. An individual, trust, or estate that is subject to income taxes in high tax states may have consumed all, or substantially all, of his or its roughly $40,000 deduction cap already. If he or it also has significant income allocated from a Virginia PTE, PTET planning is critical at a much lower level. High state and local income tax states include California, Massachusetts, New York, Maryland, and Maine.
There are methods and planning to maximize the proper use of the Virginia PTET Regime. Because the Regime has been extended into 2027 and beyond, the time for planning is now.
