Could taxpayers claim Virginia's disability-income subtraction for police-retirement benefits already excluded from federal adjusted gross income?

Plain-English summary

The taxpayers could not subtract disability benefits that had already been excluded from federal adjusted gross income. They claimed Virginia disability-income subtractions for District of Columbia police-retirement benefits in 2009 and 2010.

Virginia begins with federal adjusted gross income and then applies specific state modifications. The couple's federal returns excluded the retirement benefits, and their Forms 1099-R did not identify taxable income from the plan.

Because the benefits never entered the federal—and therefore Virginia—starting amount, Virginia could not subtract them again. The assessments were upheld.

Common questions

Q: Did the ruling decide whether the benefits were federally excludable?
A: It relied on the exclusion reflected in the taxpayers' federal returns and information forms.

Q: Why was the Virginia subtraction denied?
A: A subtraction cannot remove income that was not included in federal adjusted gross income.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(4)(b).
• IRC §§ 22(c)(2)(B)(iii), 72, 105(a), and 104.

Subject

Department disallowed the subtraction for disability income.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-134

Original ruling text

August 20, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter in which you seek correction of the individual income tax assessments issued to your clients, * (the "Taxpayers"), for the taxable years ended December 31, 2009 and 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, claimed a subtraction for disability income on their 2009 and 2010 Virginia individual income tax returns. Under audit, the Department disallowed the subtraction on the basis that the husband was gainfully employed while receiving the disability income. Assessments were issued for both taxable years. The Taxpayers appeal the assessments, contending the income is a disability benefit granted under the District of Columbia's Police and Firefighter's Retirement Relief Act and is excludable from income for federal income tax purposes.

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 federal adjusted gross income (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 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal IRC § 22(c)(2)(B)(iii). This IRC section provides a federal income tax credit for a portion of disability income as defined under IRC § 72 or §105(a) to the extent such income constitutes wages, or payments in lieu of wages, for the period of time during which an individual is absent from work due to permanent and total disability.

The Taxpayers assert that the husband's District of Columbia Federal Police Retirement income is excludable from FAGI under IRC § 104. Distributions from the plan are reported annually, but none of the income is identified as taxable on the federal information return (Form 1099-R).

The Taxpayers' federal income tax returns reflect this treatment. The amount of District of Columbia Federal Police Retirement income appears to be excluded from pension and retirement income reported on their 2009 and 2010 federal income tax returns. As such, the excludable income was not included in FAGI reported on the Taxpayers' Virginia income tax returns.

Because the District of Columbia Federal Police Retirement income was not included in FAGI, the Taxpayers were not entitled to subtract the income on their Virginia returns. As such, the Department correctly disallowed the disability income subtraction for the taxable years at issue.

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 sections 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, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4973587879.D