Could a full-year Virginia resident and part-year-resident spouse claim a credit for tax paid on wages earned in another state?

Plain-English summary

Virginia found the couple eligible for an out-of-state tax credit and recommended an amended part-year return. The husband became a Virginia resident during 2007, while the wife was a full-year resident.

They could file one joint part-year Virginia return. The husband would report income, deductions, and a prorated exemption for his Virginia-resident period; the wife would attribute all of her income and deductions to Virginia and receive her full exemption.

The credit covered qualifying earned or business income taxed by the other state. It could not exceed the lesser of the tax actually paid there or the Virginia tax imposed on the same income.

The couple supplied the other-state return and received 30 days to amend the Virginia filing and pay the appropriate balance.

What this means for you

• Track each spouse's Virginia residency period separately.
• A full-year and part-year spouse can use one joint part-year return.
• Keep the other-state return and proof of tax paid.
• Calculate both sides of the credit limitation.

Citations and references

• Va. Code §§ 58.1-303 and 58.1-332(A).
• Virginia Public Document 97-301 (July 7, 1997).

Subject

Taxpayers eligible for an out-of-state tax credit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-122

Original ruling text

June 30, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2007.

FACTS

The Taxpayers, a husband and a wife, timely filed their 2007 Virginia individual income tax return and claimed a credit for taxes paid to * (State A). The Department requested verification of the tax paid to State A. When the requested information was not received, the Department disallowed the credit and issued an assessment for additional tax, penalty and interest.

The Taxpayers appeal the assessment, contending their income was not subject to Virginia income tax because they were employed in State A. In addition, the Taxpayers assert that the husband did not become a resident of Virginia until July 2007.

DETERMINATION

Part-Year Resident

The Taxpayers contend the husband was a resident of State A for a portion of the 2007 taxable year. Under such circumstances, Va. Code § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period in which he is a Virginia resident and is taxed as a resident only for the portion of the year that he resides in Virginia.

Generally, an individual who moves into or out of Virginia is permitted to file a part-­year income tax return. When one spouse is a full-year resident and the other is a part-year resident, the married couple may file jointly on one part-year return. The part-year resident spouse would compute his income and deductions as provided under Va. Code § 58.1-303, while the full-year resident spouse would attribute all of her income and deductions to Virginia. The part-year resident spouse would be allowed a prorated personal exemption, and the full-year resident spouse would be able to claim the full amount of the exemption.

Credit for Tax Paid to Another State

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).

Based on the information provided, the Taxpayers were eligible for an out-of-state tax credit for the 2007 taxable year. The Taxpayers have provided a copy of their State A income tax return.

However, because the husband was a part-year resident, the Taxpayers may have additional information that more accurately reflects their taxable income. As such, it is recommended that the Taxpayers amend their Virginia individual income tax return. The amended return, along with the appropriate payment, should 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: *.If the amended return is not filed within the time prescribed, the assessment will be adjusted based on the information provided.

If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4672019935.D