Could a Virginia military officer subtract combat-zone pay that exceeded the federal exclusion and remained in federal adjusted gross income?

Subject

Officer could subtract qualifying combat pay left in federal adjusted gross income

Plain-English summary

Virginia allowed the portion of qualifying combat-zone compensation that remained in the officer's federal adjusted gross income. Virginia starts with federal adjusted gross income and permits a combat-zone or qualified-hazardous-duty subtraction only to the extent the pay is included in that federal starting point.

Enlisted personnel generally exclude qualifying combat pay federally, so that already excluded amount cannot be subtracted again on the Virginia return. Officers have a capped federal exclusion, however, and compensation above the cap can remain in taxable wages.

The taxpayer documented that part of his qualifying 2005 officer pay exceeded the federal exclusion and appeared in taxable Form W-2 wages. Virginia allowed that portion and directed a revised assessment.

What this means for you

• Virginia does not allow a second subtraction for combat pay already excluded from federal adjusted gross income.
• Officers may have qualifying combat compensation remaining in federal income because the federal exclusion is limited.
• W-2 and service documentation must identify the qualifying amount still included federally.

Common questions

Was all combat pay subtracted?

No. Only qualifying pay included in federal adjusted gross income was eligible.

Why can officers differ from enlisted personnel?

The federal officer exclusion is capped, so some qualifying compensation can remain federally taxable.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(21).
• IRC § 112.
• Virginia Public Document 08-182.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-124

Original ruling text

August 7, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable years ended December 31, 2005.

FACTS

The Taxpayer is a resident of Virginia who was on active duty in a combat zone during the 2005 taxable year. He claimed a subtraction on his 2005 Virginia individual income tax return for military wages resulting from combat duty or extended active duty. The Department disallowed the subtractions for combat duty pay on the 2005 Virginia return. The Taxpayer appeals the assessment, asserting that a portion of the military wages at issue is exempt from Virginia 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.

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. Because of Virginia's conformity with federal law, the Virginia subtraction only applies to military pay attributable to service in a combat zone or a qualified hazardous duty area included in FAGI.

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. Because enlisted military personnel's combat duty pay would not be included in FAGI, it is not eligible for the subtraction.

In addition, officers serving in these areas are allowed a partial exclusion for such compensation. Thus, it is possible that a military officer could have combat duty pay included in their FAGI that is eligible for the Virginia subtraction.

Based on review of the assessment, the Taxpayer concedes that a portion of the amount claimed as a subtraction on the 2005 return was not included in FAGI. He does contend, however, that an additional portion of the income, received for qualifying service, was included on his Form W-2 as taxable wages because it exceeded the maximum amount excludible by the Internal Revenue Service.

Based on the documentation provided, the Taxpayer is eligible for a subtraction for compensation for active duty service in a combat zone or a qualified hazardous duty area, as set forth therein. Accordingly, the Taxpayer's 2005 income tax return will be adjusted to allow the qualifying portion of the subtraction and a revised assessment will be issued.

The Code of Virginia sections cited 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 regarding this determination, you may contact * in the Office of Tax Policy,

Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3152651253.E