Recent legislative developments in Virginia have placed state income tax policy firmly in the spotlight. For decades, Virginia’s individual income tax system has maintained a relatively stable structure with a flat top marginal rate. That may soon change.
Proposals currently before the Virginia General Assembly would introduce higher income tax brackets for the state’s highest earners and expand taxation on investment income. If enacted as proposed, these measures could significantly alter Virginia’s tax landscape—potentially giving the Commonwealth one of the highest state income tax rates in the nation.
For high-income individuals, investors, and business owners, these developments raise important planning questions. Our tax team at Alperin Law & Wealth is actively monitoring these proposals and evaluating how potential changes could affect clients when and if action becomes appropriate.
What the Proposed Virginia Tax Bills Would Do
Two bills under consideration in the 2026 Virginia General Assembly are central to the current discussion.
Higher Income Tax Brackets for High Earners
House Bill 979 proposes a restructuring of Virginia’s individual income tax brackets. Under current law, Virginia’s top marginal income tax rate is 5.75%, which applies once taxable income exceeds a relatively low threshold.
HB 979 would introduce new, higher brackets for individuals with substantial income, beginning at $600,000 and increasing further for income above $1 million. This change would result in higher effective tax rates for Virginia’s highest earners.
New Tax on Investment Income
House Bill 378 would add a new net investment income tax, modeled after the federal surcharge of the same name. The proposal would impose an additional 3.8% tax on net investment income—such as interest, dividends, capital gains, rental income, and similar sources—once income exceeds specified thresholds.
The Combined Impact
If enacted together and in their current form, these bills could raise Virginia’s effective top marginal income tax rate to approximately 13.8%. That figure would exceed the top state income tax rates of states traditionally viewed as high-tax jurisdictions, including California.
While the future of these proposals remains uncertain—and amendments are possible—their introduction signals a meaningful shift in Virginia’s approach to taxing high income and investment gains.
Why These Proposals Matter Now
For individuals with complex financial profiles, state tax changes can have far-reaching implications.
Higher state income taxes may influence decisions related to:
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Timing of business sales or liquidity events
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Recognition of capital gains and other investment income
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Residency and domicile planning
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Estate and trust planning strategies
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Retirement distribution timing
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Investment allocation and passive income planning
Because state income taxes apply annually and interact with federal tax rules, even incremental increases can materially affect long-term outcomes and after-tax returns.
Two Realistic Planning Scenarios
Scenario 1: Business Owner Considering a Sale
Julia, a long-time entrepreneur in Northern Virginia, has received an offer to sell her company. Under current law, her Virginia state tax exposure on the sale would be relatively modest compared to federal capital gains tax.
If the proposed higher income brackets and net investment income tax take effect before the transaction closes, her state tax liability could increase significantly. This change could meaningfully affect her net proceeds and introduce additional considerations around transaction timing and structure. Early planning discussions may help evaluate options well in advance of a sale.
Scenario 2: Investor with Substantial Passive Income
Dennis and Maria, a retired couple, rely on dividends and capital gains from a diversified investment portfolio to supplement retirement income. Under current law, their investment income is taxed at Virginia’s flat 5.75% rate.
If a net investment income tax is enacted, a portion of their portfolio income could be subject to additional tax, reducing cash flow during retirement. Proactive planning may explore asset location, timing of sales, or more tax-efficient investment strategies.
What This Means for You
At this stage, no changes have become law. Both HB 979 and HB 378 remain under consideration and would need approval by both legislative chambers and the governor before taking effect—potentially beginning with the 2027 tax year if enacted.
That said, the introduction of these proposals indicates that Virginia tax policy is in flux.
For individuals and families with substantial income, investment gains, or business interests, the potential changes could:
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Increase effective tax rates on income and investment returns
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Influence when and where income is recognized
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Affect retirement cash flow projections
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Alter assumptions used in estate and succession planning
Our tax team at Alperin Law & Wealth is closely tracking the legislative process and analyzing how these proposals may interact with existing financial, estate, and business planning strategies. When appropriate and feasible, we help clients evaluate options to manage potential tax exposure under evolving law.
A Thoughtful Approach in an Uncertain Tax Environment
Tax proposals—especially those still under debate—can create uncertainty. But uncertainty does not require inaction. Staying informed and engaging in proactive planning can help position financial and estate plans to adapt as policy evolves.
If you have questions about how these proposed changes could affect your personal situation or long-term goals, thoughtful guidance can help you evaluate strategies using today’s best available information.
Our team is here to help you approach these developments with clarity, confidence, and purpose.