Could a Virginia resident claim a state credit for foreign tax withheld from mutual-fund investment income?

Plain-English summary

Virginia did not allow a credit for foreign tax withheld from mutual-fund investment income. The ordinary resident credit addressed specified income taxed by both Virginia and another state. The governing regulation said that credit did not apply to tax paid to a foreign country.

Virginia separately allowed a foreign-country credit for pension or retirement income included in federal adjusted gross income and derived from past employment in that country.

The taxpayer's income came from mutual-fund investments, not a pension or retirement plan based on foreign employment. Neither credit applied, so the assessment remained due.

Common questions

Q: Does Virginia's other-state credit include foreign countries?
A: No. The ruling says it applies only to income tax paid to another state.

Q: When could foreign tax qualify under the separate rule?
A: For qualifying pension or retirement income derived from past employment in the foreign country.

Citations and references

• Va. Code §§ 58.1-332 and 58.1-332.1.
• 23 VAC 10-110-220.

Subject

Tax credit for income tax paid on foreign source income.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-110

Original ruling text

July 3, 2012

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 taxable year ended December 31, 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a Virginia resident, claimed a tax credit for income tax paid on foreign source income for the 2010 taxable year. Under audit, the Department disallowed the credit and issued an assessment. The Taxpayer paid the assessment and filed an appeal, contending he is entitled to the credit because taxes were withheld by his financial institution for foreign income tax.

DETERMINATION

Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these, types of income during the same taxable year. Title 23 of the Virginia Administrative Code (VAC) 10-110-220 provides that the credit "is applicable only to income tax paid to another state and does not apply to taxes paid to any foreign country."

In addition, Va. Code § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in federal adjusted gross income, derived from past employment in the foreign country and subject to Virginia income tax.

In this case, the Taxpayer's investment in mutual funds resulted in foreign source income from which foreign income tax was withheld. Based on the information available, the foreign source income did not result from a pension or retirement plan derived from past employment in a foreign country.

Accordingly, the Department's adjustment is correct and the assessment remains due and payable. An updated bill will be issued shortly to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line 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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4889602222.D