Could a Virginia resident subtract military pay earned in Virginia before a later combat-zone deployment?

Subject

Pre-deployment Virginia military pay did not qualify for the combat subtraction

Plain-English summary

Virginia denied the couple's military-pay subtraction. The husband served on active duty in Virginia before deploying to a combat zone in July 2005. Pay earned while stationed in Virginia was not attributable to combat-zone service and therefore did not qualify.

His actual combat pay also did not create a Virginia subtraction because it had already been excluded from federal adjusted gross income under the federal combat-pay rule. The cited Virginia provision only subtracted eligible combat-zone military pay that was included in federal adjusted gross income.

The ruling explained that enlisted combat pay generally would already be federally excluded, while a commissioned officer might have a federally taxable portion capable of meeting Virginia's inclusion requirement.

What this means for you

• Separate pre-deployment pay from compensation attributable to combat-zone service.
• Reconcile the Virginia subtraction to the amount actually included in federal adjusted gross income.
• A federal exclusion and a Virginia subtraction do not stack on the same excluded income.
• Rank and federal combat-pay limits can affect whether any eligible amount remains in federal income.

Common questions

Did later deployment make earlier Virginia duty pay eligible?

No. The earlier pay was not attributable to service in the combat zone.

Why did the actual combat pay not qualify?

It was not included in federal adjusted gross income.

Could an officer have a different result?

Potentially. The ruling said the subtraction could apply to eligible officer combat pay that remained included in federal adjusted gross income.

Citations and references

• Va. Code § 58.1-322(C)(21).
• IRC § 112.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-105

Original ruling text

June 24, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter appealing the individual income tax assessments issued to * (the "Taxpayers") for the taxable year ended December 31, 2005.

FACTS

The Taxpayers, a husband and wife, are residents of Virginia. They claimed a subtraction on their 2005 Virginia individual income tax return for military wages resulting from combat duty. The Department disallowed the subtraction for combat duty pay on the basis that the combat duty pay was not included in the husband's federal adjusted gross income. The Taxpayers appeal the assessment, asserting the military wages are eligible for the subtraction.

DETERMINATION

Virginia Code § 58.1-322 C 21 allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. This subtraction is limited, however, to eligible military pay included in a taxpayer's federal adjusted gross income (FAGI)

Pursuant to Internal Revenue Code (IRC) § 112, enlisted military personnel can exclude amounts received as compensation for active duty service in a combat zone or a qualified hazardous duty area. The statute also grants commissioned officers serving in these areas an exclusion for a portion of such pay.

Because the combat duty pay of enlisted military personnel would not be included in FAGI, it would not eligible for the subtraction. Thus, the Virginia subtraction is only available for officers whose eligible military pay is partially included in FAGI.

The husband was on active duty in January 2005, but was not deployed to a combat zone until July of that year. Thus, he concedes that a portion of his military pay was earned while stationed in Virginia. The information provided shows that the husband's combat pay was not included in the Taxpayers' FAGI for the 2005 taxable year.

On their 2005 Virginia individual income tax return, the Taxpayers subtracted the military pay earned while the husband was on active duty in Virginia. Such income is not eligible for the subtraction provided by Va. Code § 58.1-322 C 21. Accordingly, the Department's assessment is correct.

A revised bill, with interest accrued to date, will be sent to the Taxpayers. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.

The Code of Virginia sections and tax bulletin cited, along with other reference materials, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3114296182.B