Could Virginia residents subtract combat pay already excluded federally and claim the full $15,000 extended-duty subtraction?

Subject

Combat and extended-active-duty subtractions were limited by federal income and basic pay

Plain-English summary

Virginia upheld both military-pay adjustments on the couple's 2005 return. The husband served on active duty in a combat zone, but the record did not show that any of his combat compensation remained in federal adjusted gross income.

Because enlisted combat pay was already excluded federally under IRC § 112, Virginia's combat-zone subtraction could apply only to an amount still included in federal income, such as a remaining portion of an officer's pay. With no such amount shown, no additional Virginia subtraction was available.

The husband also qualified generally for the extended-active-duty subtraction, but his basic military pay exceeded $15,000. Virginia reduced the claimed $15,000 subtraction by the excess, consistent with the phaseout that eliminated the subtraction at $30,000 of basic pay. The assessment had been paid, so no refund was issued.

What this means for you

• A Virginia subtraction cannot remove income already excluded from federal adjusted gross income.
• Combat-zone pay treatment can differ between enlisted personnel and officers.
• The extended-active-duty subtraction required more than 90 days of service.
• For the rule applied here, basic pay above $15,000 reduced the subtraction and $30,000 eliminated it.

Common questions

Why was the combat-pay subtraction denied?

No evidence showed that combat pay was included in the couple's federal adjusted gross income.

Was the extended-duty subtraction always $15,000?

No. It was reduced when basic military pay exceeded $15,000 and fully phased out at $30,000.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322(C)(21), and 58.1-322(C)(23).
• IRC § 112.
• P.D. 08-182.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-106

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 assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2005. I apologize for the delay in this response.

FACTS

The Taxpayers, a husband and a wife, are residents of Virginia. They claimed subtractions on their 2005 Virginia individual income tax return for military wages resulting from combat duty and from extended active duty. The Department disallowed the subtraction for combat duty pay and adjusted the subtraction for extended active duty pay on the 2005 Virginia return, resulting in the assessment of additional tax and interest. The Taxpayers appeal the assessment, asserting that the military wages at issue are exempt from Virginia income tax.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI) as defined by the IRC as it existed on December 31, 2007, with two exceptions. See Public Document (P.D.) 08-182 (10/17/2008). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

Combat Duty Pay

To the extent included in FAGI, Va. 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.

Pursuant to 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 designated by order of the President of the United States. In addition, officers serving in these areas are allowed a partial exclusion for such compensation. Because of Virginia's conformity with federal law, the Virginia subtraction only exempts the remaining portion of an officer's military pay attributable to service in a combat zone or a qualified hazardous duty area. Because enlisted military personnel's combat duty pay would not be included in FAGI, it is not eligible for the subtraction.

The husband was on active duty in a combat zone during the 2005 taxable year. The information provided gives no indication that any of the husband's combat pay was included in the Taxpayers' FAGI for the taxable year at, issue. As such, the subtraction provided by Va. Code § 58.1-322 C 21 is not available, and the Department's adjustment is correct.

Extended Active Duty Pay

To the extent included in FAGI, Va. Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of military basic pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the taxpayer exceeds $15,000 and is fully phased out when basic military pay reaches $30,000. This subtraction is available whether the individual is stationed inside or outside of Virginia.

The Taxpayers claimed a military pay subtraction in the amount of $15,000. A review of the tax return shows that the husband's military pay exceeded $15,000. Under audit, the Department auditor reduced the Taxpayers' subtraction by the amount that the husband's military pay exceeded $15,000. Accordingly, the adjustment to the Taxpayers' military pay subtraction is in accordance with Va. Code § 58.1-322 C 23 and is correct.

Conclusion

Based on the foregoing, the assessment for the 2005 taxable year is correct. Department records show that the assessment has been paid; therefore, no refund will be issued.

The Code of Virginia sections and public document 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2933440119.E