Could a part-year Virginia couple claim credit for tax on wages excluded from Virginia income?

Plain-English summary

Virginia denied the couple's credit for income tax paid to the other state because the wife earned the wages while she was a resident there and the wages were excluded from Virginia taxable income.

One spouse was a full-year Virginia resident and the wife was a part-year resident. A married couple could file one joint part-year return, allocating all of the full-year spouse's income to Virginia and only the appropriate portion of the part-year spouse's income.

Virginia law barred a part-year resident from claiming a credit for tax paid to the other jurisdiction of residence for that non-Virginia-resident portion of the year. Independently, the general credit was limited to tax on income also taxed by Virginia. Because the couple excluded the State A wages, Virginia imposed no tax on them and there was no overlapping Virginia liability to credit.

What this means for you

• Separate each spouse's full-year or part-year residency before computing a joint return.
• Allocate part-year wages to the correct residency period.
• An other-state credit generally addresses the same income being taxed twice.
• You cannot both exclude income from Virginia taxation and claim a Virginia credit for tax paid on that income.

Common questions

Q: Did Virginia tax the wife's other-state wages?
A: No. The couple excluded them from Virginia taxable income.

Q: Why did the part-year rule matter?
A: It barred credit for tax paid to the jurisdiction where the wife was resident during that portion of the year.

Q: Was a refund issued?
A: No. Virginia upheld the paid assessment.

Citations and references

• Va. Code §§ 58.1-303 and 58.1-332 A.
• Virginia Public Document 97-301.

Subject

Taxpayers were not eligible for a credit for taxes paid to State A

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-28

Original ruling text

March 5, 2013

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 assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, filed a Virginia part year return for the 2010 taxable year. The husband was a full year Virginia resident and the wife a part year Virginia resident. The wife lived and worked in * (State A) for a part of the 2010 taxable year. The Taxpayers filed a State A income tax return and paid income tax on the wife's wages earned in State A. The Taxpayers filed a Virginia income tax return, excluded the wages earned in State A from the Virginia taxable income and claimed a tax credit for the income tax paid to State A.

Under audit, the Department disallowed the tax credit and issued an assessment for additional tax and interest. The Taxpayers paid the assessment and filed an appeal contending the Department should allow the tax credit because the State A income was subject to Virginia income tax.

DETERMINATION

Virginia Code § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period in which he or she is a Virginia resident and is taxed as a resident only for the portion of the year that he or a she resides in Virginia. Generally, an individual who moves into or out of Virginia is permitted to file a part-year income tax return.

A married couple is permitted to file jointly on one part-year return when one spouse is a full-year resident and the other is a part-year resident. The part-year resident spouse must compute their income and deductions as provided under Va. Code § 58.1-303, while the full-year resident spouse would attribute all of their income and deductions to Virginia. The part-year resident spouse is allowed a prorated personal exemption, and the full-year resident spouse may be able to claim the full amount of the exemption.

In this case, the Taxpayers correctly attributed all of the husband's income, deductions, and personal exemption to Virginia, and appropriately attributed a portion of the wife's income, deductions, and exemption to Virginia. In addition, however, the Taxpayer's claimed a credit on the part-year return for taxes paid to State A.

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).

Notwithstanding the provisions of Va. Code § 58.1-332, Va. Code § 58.1-303 prohibits part-year residents from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. Under this statute, the Taxpayers were not eligible for a credit for taxes paid to State A while the wife was a resident of State A.

Furthermore, when the Taxpayers filed their Virginia tax return, they excluded the State A wages from the Virginia taxable income. Because the wife's wages were excluded from Virginia taxable income, no Virginia income tax was imposed on the State A income and no credit can be permitted under the provisions of Va. Code § 58.1-332. Accordingly, the Department's assessment is upheld and no refund will be issued.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5084584603.D