Could Virginia residents subtract a New York state pension when their employee contributions had not been taxed by New York?

Subject

New York pension was taxable because prior contribution taxation was not shown

Plain-English summary

Virginia included the husband's New York state pension in the couple's 2005 taxable income. Virginia began with federal adjusted gross income and allowed a retirement-income subtraction only to the extent qualifying contributions had previously been subject to another state's income tax.

Certain New York retirement tiers required employees to add contributions back when computing New York taxable income. But the couple's last two New York returns from the husband's employment showed no such add-back.

Because they did not establish that New York had taxed the contributions, the Virginia subtraction did not apply. Virginia also refused to waive interest because state law made assessment interest mandatory compensation for use of money due to the Commonwealth.

What this means for you

• Virginia did not exempt an out-of-state government pension merely because another state paid it.
• The subtraction required proof that contributions were previously taxed by the other state.
• Prior state returns were key evidence of an add-back or other contribution taxation.
• Assessment interest was mandatory rather than a discretionary penalty.

Common questions

Did every New York employee have the same contribution treatment?

No. The ruling said treatment varied by retirement tier and noted that generally only Tier III and IV employees had required add-backs, subject to exceptions.

Why was interest not waived?

Virginia treated it as a statutory charge for use of money, not a penalty.

Citations and references

• Va. Code §§ 58.1-1812, 58.1-301, 58.1-322, and 58.1-322(C)(19).
• IRC §§ 401, 408, and 457.
• P.D. 04-177.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-79

Original ruling text

May 26, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek the correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2005.

FACTS

The Taxpayers, a husband and wife, were residents of Virginia for the taxable year at issue. The husband, a retired state employee of New York, received pension distributions from the New York state retirement system. The Taxpayers did not include the distribution as part of their Virginia taxable income because they believed the husband's pension income was exempt from state taxation.

The Department audited the Taxpayers' 2005 Virginia income tax return and adjusted their Virginia taxable income to include the husband's pension distribution, resulting in the assessment of additional tax. The Taxpayers contend that the distributions from the New York pension are exempt from taxation. They request that interest be waived if the tax is owed.

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 FAGI. 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. Virginia Code § 58.1-322 C 19, however, provides a subtraction for:

any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by § 401 of the Internal Revenue Code, an individual retirement account or annuity established under § 408 of the Internal Revenue Code, a deferred compensation plan as defined by § 457 of the Internal Revenue Code, or any federal government retirement program, the contributions to which were deductible from the taxpayer's federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state.

The taxation of pension income from former New York state employee was addressed in Public Document (P.D.) 04-177 (10/6/2004). New York Law § 612(b)(26) provides that certain contributions to the New York state retirement system or pension fund must be added to federal adjusted gross income (FAGI) when calculating New York individual income tax. In the state of New York, employees are assigned to a tier for retirement purposes depending on the year in which they joined the retirement system. With certain exceptions, only Tier III and Tier IV employees are required to add pension contributions to FAGI.

A review of the Taxpayers' last two New York returns filed while the husband was still employed in New York indicates that no contributions were added back to FAGI in calculating the Taxpayers' New York tax liability. As such, because the contributions to the husband's retirement system were not subject to taxation under the income tax in New York, the Taxpayers were not entitled to subtract the pension distributions from their Virginia taxable income for the 2005 taxable years. Accordingly, the tax is correct.

In regard to your request to waive interest, Virginia Code § 58.1-1812 mandates the application of interest to any assessment of tax. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money that was properly due the Commonwealth. Based on the information presented, I find no basis to waive the assessed interest.

CONCLUSION

The assessment is correct as issued. 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 public document 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/1-2878818591.B