Did joint-bank records prove that a Virginia resident separately paid all itemized deductions from a nonresident spouse?

Plain-English summary

Virginia found the submitted joint-bank records insufficient to prove that the resident spouse separately paid all claimed itemized deductions. The Virginia resident and nonresident spouse filed a joint federal return but separate state returns.

When deductions and exemptions cannot be separately accounted for, Virginia allocates them between spouses in proportion to each spouse's federal adjusted gross income. The resident claimed nearly all federal itemized deductions on the Virginia return and showed that his payroll entered the joint account used for the Virginia home's mortgage and real-estate taxes.

Nine transfers from another bank account also entered the joint account. The taxpayer did not show who owned that source account or whether the transfers included the spouse's funds. Virginia therefore could not confirm that the payments were free from commingling.

The taxpayer received a final 30 days to document separate accounting. Without that evidence, the audit would apply proportional allocation.

What this means for you

• Payroll deposits alone may not prove who funded a deduction when other money enters the account.
• Trace transfers to their source and document account ownership.
• Keep payment records for mortgage interest, real-estate tax, and other jointly reported deductions.
• A documentation opportunity is not a final grant of the claimed deduction.

Common questions

Q: Did Virginia permanently reject separate accounting?
A: Not yet. It gave the taxpayer 30 days to provide stronger evidence.

Q: What would happen without more proof?
A: Deductions and exemptions would be proportionally allocated using FAGI.

Citations and references

• Va. Code §§ 58.1-322, 58.1-324, and 58.1-326.
• 23 VAC 10-110-190(B).
• Virginia Public Documents 95-251 (September 29, 1995) and 11-170 (September 29, 2011).

Subject

Information was insufficient to show separately accounted for itemized deductions.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-197

Original ruling text

December 6, 2011

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 Taxpayer") for the taxable year ended December 31, 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a resident of Virginia, is married to a nonresident individual who works and resides in * (State A). For the 2007 taxable year, the couple filed a joint federal income tax return and separate state income tax returns. The Taxpayer filed a Virginia income tax return, and his spouse filed a State A income tax return. The spouse had no income from Virginia sources.

Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect his percentage of the couple's joint income and issued an assessment for additional tax and interest. The Taxpayer appeals the assessment, contending he separately accounted for the itemized deductions.

DETERMINATION

In cases where a Virginia resident and nonresident spouse file separate state income tax returns, Virginia Code § 58.1-326 grants the Department authority to modify the allocation of exemptions and deductions claimed for federal income tax purposes under Va. Code § .58.1-324. Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, 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).

In P.D. 11-170 (9/29/2011), the Tax Commissioner ruled that the apportionment computation for a resident taxpayer is based on his or her federal adjusted gross income (FAGI). Pursuant to Va. Code § 58.1-322, Virginia starts with the FAGI, requires certain additions, and permits certain deductions and subtractions in computing Virginia taxable income. Accordingly, the Department considers it rational to apportion deductions and exemptions between a husband and wife under Va. Code § 58.1-326 based on FAGI.

The Taxpayer claimed all of the itemized deductions on his Virginia income tax return, except the spouse's state income tax paid. He asserts his wife maintained a separate residence in State A and he paid all of the expenses of maintaining the home in Virginia. The Taxpayer has provided copies of joint bank statements into which only his payroll check was deposited and from which the mortgage payments and real estate taxes were paid for the Virginia home. The Taxpayer asserts that this evidence shows that the expenses for the Virginia home were paid solely by him.

In addition to the deposits of the Taxpayer's payroll checks, nine transfers were made into this joint checking account from another bank account. No information has been provided to show whether or not this account was held jointly by the Taxpayer and the spouse. The Taxpayer must show that the funds transferred into the account during the taxable year were not commingled with funds of the spouse. Accordingly, the Department finds information provided its insufficient to show that the Taxpayer separately accounted for his itemized deductions.

I will, however, allow the Taxpayer a final opportunity to provide documentation that supports his contention of separate accounting. Please send the documentation within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attn: *. If the requested information is not provided within the allotted time, the assessment will be returned to the auditor to be adjusted according to the provisions of this letter.

The Code of Virginia sections, regulation and public documents 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 about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4654642774.D