Federal Tax Law Changed. Virginia and North Carolina Did Not Simply Follow.

For years, both Virginia and North Carolina adopted federal tax law changes more or less automatically. Neither does now. Each state has set a fixed date for the federal tax law it recognizes, and each has chosen to reject specific federal provisions outright.

The practical result is the same in both states: a strategy that produces a favorable federal outcome may not produce the same outcome on your state return. Depreciation timing, research expenses, itemized deductions, entity structure, and decisions about accelerating or deferring income may now require separate federal and state calculations.

At the same time, the 2025 federal legislation made a number of provisions permanent and introduced several temporary ones.

Below is a summary of what changed in each state, and then federally.

Virginia: fixed conformity as of December 31, 2025

House Bill 29, signed February 20, 2026, replaced Virginia’s rolling conformity with a fixed conformity date of December 31, 2025. The Department of Taxation issued Tax Bulletin 26-1 explaining the treatment. Virginia now conforms only to provisions the General Assembly specifically adopts, along with federal extenders.

Areas where the divergence is most likely to matter:

Research and development expensing. Federal law now permits immediate expensing of domestic research and experimental expenditures under IRC §174A, including retroactive and catch-up provisions. Virginia deconforms. For any business with research or development spending, the federal and Virginia treatment now differ substantially.

Equipment purchases. Federal law restored 100% bonus depreciation and raised Section 179 expensing to $2,560,000 for 2026. Virginia deconforms from both. For a significant equipment purchase, the federal and Virginia outcomes differ substantially and should be modeled separately.

Itemized deductions. The federal overall limitation on itemized deductions, commonly called the Pease limitation, was suspended and later replaced under the 2025 federal act. Virginia does not conform and continues to apply the Pease limitation.

State and local taxes. Virginia generally does not apply a SALT cap in computing Virginia itemized deductions. Taxpayers subject to Virginia’s overall limitation, however, must apply the federal SALT cap for the year, including the higher temporary cap.

Pass-through entity tax. The PTET election and its associated credits were made permanent under the 2026 legislation. Under prior law the election and most credits would have expired January 1, 2027. For owners of pass-through businesses, this removes a sunset that had been a planning constraint and remains among the more useful tools available in Virginia.

A SCHEDULED REVERSION WORTH NOTING

The Virginia standard deduction is $8,750 for single filers and $17,500 for married couples filing jointly in 2026. It rises to $9,200 and $18,400 for 2027, then to $9,300 and $18,600 for 2028 and 2029.

After Taxable Year 2029, the increased amounts are scheduled to sunset and revert to the pre-2019 figures of $3,000 for single filers and $6,000 for married couples filing jointly. Absent further legislation, that is a substantial change, and it is worth keeping in view for anything involving multi-year projections.

One further Virginia change worth knowing: state innocent spouse relief became available July 1, 2026, giving a spouse relief from joint liability on a Virginia return whether or not a federal claim was filed.

North Carolina: conformity updated, with its own carve-outs

North Carolina reached a similar place by a different route. The State had been anchored to the Internal Revenue Code as it stood on January 1, 2023, which meant that none of the 2025 federal changes applied for North Carolina purposes. That left taxpayers filing 2025 returns without knowing what the State would ultimately adopt, and many extended their returns rather than file twice.

Senate Bill 595 resolved it. Signed by Governor Josh Stein on July 2, 2026, it moved the State’s conformity date forward to July 5, 2025, which brings the 2025 federal legislation into North Carolina law except where the State specifically decoupled. The Department of Revenue has since issued guidance on how the change affects returns for earlier years.

If you filed a 2025 North Carolina return before July, it may now be wrong. Returns filed under the old conformity date may warrant amending, and returns that were extended can now be completed. This is worth checking rather than assuming.

Where North Carolina departs from federal treatment:

Research and development expensing. Federal law permits immediate expensing of domestic research costs under IRC §174A. North Carolina requires 80% of that deduction to be added back, recovered at 25% of the addback in each of the next four years. The deduction is not lost, but it is spread across five years rather than taken at once.

Bonus depreciation. North Carolina’s longstanding decoupling continues and now reaches the newer qualified production property rules as well. 85% of the federal bonus deduction is added back and recovered over five years.

A FALLING RATE, AND A QUESTION ON THE BALLOT

North Carolina’s flat individual income tax rate is 3.99% for 2026, down from 4.25% for 2025. Further reductions to 3.49% for 2027 and 2.99% for 2028 are written into law and take effect automatically if State revenue clears statutory thresholds. The Office of State Budget and Management projected in May 2026 that the thresholds for both would be met.

Separately, a constitutional amendment on the November 2026 ballot would lower the State’s constitutional ceiling on personal and corporate income tax rates from 7% to 3.5%, effective for taxable years beginning on or after January 1, 2027. It would not reduce anyone’s current rate, which is already below that figure. It would constrain what future legislatures could do.

Two further points: the North Carolina standard deduction is $12,750 for single filers and $25,500 for married couples filing jointly for 2026, and North Carolina imposes no state estate tax.

Federal changes worth knowing

The 2025 federal legislation made permanent the seven-bracket rate structure, ranging from 10% to 37%, that had been scheduled to sunset, along with the expanded standard deduction. For 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household.

IF YOUR ESTATE PLAN PREDATES 2018

The federal estate tax exemption rose to $15 million per individual for 2026 decedents, up from $13.99 million in 2025, and is now permanent with annual inflation indexing.

For most estates the direct tax exposure is limited. The more common issue is different: documents drafted when the exemption was substantially lower often contain formula clauses that divide an estate by reference to the exemption amount. At a $15 million exemption, those formulas may distribute very differently than intended when they were written. If your documents have not been reviewed in several years, this is worth revisiting regardless of whether you expect to owe estate tax.

Senior deduction. Taxpayers age 65 and older may claim an additional $6,000 deduction. This applies per eligible person, so a married couple where both spouses qualify may claim $12,000. The deduction is reduced by six cents for each dollar of modified adjusted gross income above $75,000 for single filers and $150,000 for joint filers, and is fully phased out at roughly $175,000 and $250,000 respectively. Married taxpayers filing separately are not eligible. The provision applies for 2025 through 2028 and is in addition to the existing age-based additional standard deduction.

New temporary deductions, 2025 through 2028. New deductions are available for qualified tips, qualified overtime, and interest on loans for U.S.-assembled vehicles. Each has its own eligibility rules and income phase-outs, Virginia allows only a partial subtraction, and North Carolina treatment should be confirmed [VERIFY BEFORE SENDING]. If one may apply to you or to a family member, it is worth asking about.

SALT cap. Raised from $10,000 to $40,000 for 2025 and $40,400 for 2026, reduced for taxpayers with modified adjusted gross income above $505,000 in 2026 but not below $10,000. The higher cap is temporary and is scheduled to revert to $10,000 in 2030. Combined with the higher standard deduction, this may be a reason to revisit the itemize-versus-standard comparison if you have not itemized in recent years.

Business provisions. 100% bonus depreciation was restored, Section 179 expensing rose to $2,560,000, and domestic research costs may be immediately expensed under Section 174A. All three are federal benefits that neither state follows in full, as described above.

Form 1099-K reporting. The federal threshold reverted to the prior standard: more than $20,000 in gross payments and more than 200 transactions. Virginia maintains a separate $600 state threshold with no transaction minimum, so Virginia residents receive state forms well below the federal level. Income remains taxable whether or not a form is issued.

Retirement accounts. For 2026, elective deferrals to 401(k) and 403(b) plans rise to $24,500 and IRA contributions to $7,500. Two SECURE 2.0 provisions now apply: enhanced catch-up contributions for individuals aged 60 through 63, and a requirement that catch-up contributions for designated high earners be made on a Roth basis. The second may raise adjusted gross income more than expected, which can affect other incomesensitive thresholds, including Medicare premium surcharges.

ALSO WORTH READING

Business owners are seeing a great deal of online content promoting the S corporation election as a way to reduce self-employment tax. The strategy is legitimate, but the way it is usually presented leaves out several considerations that can change the answer, including one that can quietly undo an estate plan. We have written about it separately: Addressing the hype: the S corporation election.

Common questions

What does a fixed conformity date actually mean for me?

Neither Virginia nor North Carolina automatically adopts federal tax changes. A provision that applies on your federal return may not apply on your state return unless that state’s legislature separately adopts it.

I already filed my 2025 North Carolina return. Do I need to
do anything?

Possibly. Returns filed before the July 2026 conformity legislation were prepared under the older Internal Revenue Code reference. If federal provisions enacted in 2025 affected your return, an amended return may produce a different result. It is worth having checked.

My business has research or equipment expenses. Does the
federal deduction help my state return?

Generally not in full. Virginia deconforms from the federal immediate expensing provisions for research and experimental expenditures, qualified production property, and the increased Section 179 limits, and from bonus depreciation. North Carolina requires most of the research deduction and the bonus depreciation to be added back and recovered over five years. In both states the result requires a separate calculation from the federal one.

Do I need to revisit my estate plan because the exemption
increased?

Possibly. The concern is generally not the tax itself but whether formula language drafted under a lower exemption still divides your estate the way you intended.

What is the difference between tax preparation and tax
planning?

Tax preparation reports what has already happened. Tax planning looks ahead at decisions not yet made, where timing and structure can still be influenced.

Where our tax practice fits

Hook Law maintains a tax practice led by an in-house CPA working alongside the estate planning and elder law attorneys you already know. That structure exists for a specific reason. Tax decisions and estate planning decisions are frequently the same decision viewed from different angles, and they are often made separately by professionals who never speak to one another.

We handle two distinct types of work. Tax compliance covers preparation of individual, fiduciary, estate, gift, and business returns. Tax planning is forward-looking analysis of structure, timing, and threshold positioning, engaged separately from return preparation.

If anything above raises a question about your own situation, we are glad to discuss it.