Was a nonresident servicemember's active-duty pay exempt after the couple elected to file a joint Virginia resident return for 2008?

Subject

Service Members Civil Relief Act

Plain-English summary

A nonresident servicemember's active-duty pay was taxable on the couple's 2008 joint Virginia return because they elected to file as though both spouses were Virginia residents. The husband was domiciled in another state and stationed in Virginia, while the wife was a Virginia resident.

The Servicemembers Civil Relief Act protected the military pay of a nonresident servicemember, but it did not create a subtraction after the couple chose Virginia's joint-resident filing method. Virginia therefore correctly disallowed the military-pay subtraction on the filed return.

The couple could change the result by amending within 30 days and filing separately. The wife would report her separate income, deductions, and exemptions, and the husband would file a Virginia nonresident return only if necessary. Items had to be separately accounted for; those that could not be traced would be allocated in proportion to each spouse's income.

The ruling also noted that federal military-spouse residence protections changed beginning with the 2009 tax year, so the 2008 analysis should not be applied mechanically to later years.

What this means for you

• Filing status can determine whether protected military pay enters Virginia taxable income.
• A joint resident election treats both spouses as residents for the return.
• Separate filing requires careful allocation of income, deductions, and exemptions.
• Later military-spouse amendments did not govern this 2008 return.

Common questions

Did Virginia deny that the husband was a nonresident servicemember?

No. The problem was the couple's election to file a joint Virginia resident return.

Could the couple correct the filing choice?

Yes. The ruling gave them 30 days to submit amended separate returns.

Was the final amount due decided in the letter?

No. Virginia would review the amended returns and then advise them of any balance or refund.

Citations and references

• Va. Code § 58.1-326.
• 23 VAC 10-110-190(B).
• Servicemembers Civil Relief Act, 50 App. U.S.C. § 501 et seq., as cited in the ruling.
• Virginia Public Documents 95-251, 99-82, 03-20, and 10-54.
• Virginia Tax Bulletins 09-10 and 10-1.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-194

Original ruling text

August 27, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2008. I apologize for the delay in the Department's response.

FACTS

The Taxpayers, a husband and wife, resided in Virginia during the 2008 taxable year. The husband is a domiciliary resident of * (State A) who is on active duty with the armed forces. The Taxpayers filed a joint Virginia individual income tax return on which the husband's active duty military income was claimed as a subtraction.

The Department disallowed the subtraction, resulting in an assessment. The Taxpayers appeal the adjustment, contending that the husband's active duty income is exempt from Virginia income taxation under the Servicemember's Civil Relief Act (50 App. U.S.C. § 501 et seq. ).

DETERMINATION

Virginia Code § 58.1-326 states, "If husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents." (Emphasis added.)

In filing a joint resident individual income tax return, the Taxpayers elected to file as Virginia residents under Va. Code § 58.1-326. The Servicemember's Civil Relief Act does not exempt the active duty military income of a serviceperson filing as a Virginia resident. As such, the Department was correct in its adjustment of the Taxpayers' joint income tax return.

If the intent of the Taxpayers was to exclude the husband's military income from Virginia income, they would have had to file separate individual income tax returns as required under Va. Code § 58.1-326. If they wish to change their election, they may do so by filing an amended 2008 individual income tax return, reporting the separate income, deductions and exemption for the wife, and, if necessary, a separate 2008 nonresident return for the husband.

When a resident/nonresident married couple does not elect to determine their Virginia taxable income as if both were residents, income and deductions for each must be determined in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-110-­190 B. Under this regulation, "each spouse must account separately for items of income, deductions, and exemptions." When such items cannot be accounted for separately, however, "deductions and personal exemptions must be proportionally allocated between each spouse based upon the income attributable to each." See also Public Document (P.D.) 95-251 (9/29/1995), P.D. 99-82 (4/21/1999), P.D. 03-20 (3/20/2003), and 10-54 (5/07/2010).

The amended returns must be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the returns will be reviewed and processed. If the returns are not received within this time, the Taxpayers' 2008 joint return will be adjusted in accordance with the information available. Upon completion, the Taxpayers will be advised of the balance due or refund, as applicable.

Please note that the Service Members Civil Relief Act was amended, effective for 2009 taxable year and thereafter, to provide that a spouse can neither lose nor acquire domicile or residence in a state when the spouse is present in the state solely to be with the service member in compliance with the service member's military orders if the residence or domicile is the same for both the service member and spouse. See Tax Bulletin (VTB) 9-10 (11/12/2009) and VTB 10-1 (1/29/2010) for more information on this change.

The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available online 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

Craig M. Burns

Acting Tax Commissioner

AR/1-3783842598.E