Could part-year Virginia residents claim a credit for tax paid to the state where they lived later in the same year?

Plain-English summary

Virginia denied the couple's credit for tax paid to the state where they lived after leaving Virginia because that later-period income was not taxed by Virginia. The couple had filed a full-year Virginia resident return, but the audit determined they were part-year residents.

Part-year residents are taxed only for the Virginia-resident period. Their standard deduction and personal exemptions may be prorated under the stated rules, while itemized deductions must be tied to payments made during Virginia residency.

The couple supplied a federal itemized-deduction schedule but did not identify which deductions were paid while they lived in Virginia. Virginia also disallowed the other-state credit because income earned while resident in the other state was outside Virginia's tax base.

The assessment was based on available information. The Department directed the couple to file a 2008 Virginia part-year return so their Virginia income, deductions, and liability could be calculated accurately.

What this means for you

• Allocate move-year income to the period in which you were a Virginia resident.
• Keep payment-date support for itemized deductions claimed on a part-year return.
• Virginia's other-state credit does not apply to income earned while you were resident in the other state and not taxed by Virginia.
• A correct part-year return can replace an assessment based on incomplete information.

Common questions

Q: Was the other-state credit allowed?
A: No, because the income at issue was earned while the taxpayers lived in the other state and was not subject to Virginia tax.

Q: Why were itemized deductions disallowed?
A: The taxpayers did not show which deductions were paid during their Virginia-resident period.

Q: How could the assessment be adjusted?
A: By filing an accurate 2008 Virginia part-year return with the necessary allocation information.

Citations and references

• Va. Code §§ 58.1-111, 58.1-205, 58.1-303, and 58.1-332.
• 23 VAC 10-110-40 B-C.

Subject

Part-year residents; Credits

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-64

Original ruling text

May 10, 2013

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 you, * (the "Taxpayers") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your request.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2008 taxable year and claimed a tax credit for the income tax paid to * (State A). During the course of an audit for the taxable year at issue, the Department determined that the Taxpayers were part-year residents of Virginia and requested information to substantiate their income and deductions from Virginia sources. When the Taxpayers failed to provide adequate information to determine their itemized deductions incurred while residing in Virginia, the Department disallowed the itemized deductions and the credit for taxes paid to State A and issued an assessment. The Taxpayers appeal the assessment, contending they were part-year residents of Virginia and paid all taxes due to Virginia.

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. Under Title 23 of the Virginia Administrative Code (VAC) 10-110-40 B, the allowable standard deduction of a part-year resident is prorated based on that portion of federal adjusted gross income (FAGI) attributable to Virginia as compared with total FAGI. In addition, personal exemptions are generally prorated by multiplying the amount of the exemption by the ratio of days of residence in Virginia to 365 days. However, if all of the FAGI of a part-year resident is attributable to Virginia, the individual may claim the allowable personal exemptions without any proration based upon days of residence.

The evidence available indicates the Taxpayers lived in Virginia for a portion of the 2008 taxable year before they moved to State A. As such, only the income received while they were residents of Virginia is subject to Virginia income tax.

The Department requested that the Taxpayers provide a detailed breakdown of the income and itemized deductions while they resided in Virginia. The Taxpayers provided a copy of their federal itemized deductions schedule but gave no indication of which deductions were paid while they resided in Virginia.

In addition, Title 23 VAC 10-110-40 C provides that no person who is a part year resident of Virginia during a taxable year is entitled to any credit against his Virginia tax liability for any tax payable to another state or jurisdiction under Va. Code § 58.1-332 for that portion of the taxable year during which he was a resident of such other state or jurisdiction. The Taxpayers income earned while they resided in State A would not be subject to Virginia's income tax under Va. Code § 58.1-303 and, therefore, would not qualify for Virginia's out-of-state credit.

The 2008 assessment is made based on the best information available to the Department pursuant to Va. Code § 58.1-111. Virginia Code § 58.1-205 provides that any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayers.

The Taxpayers may have additional information that more accurately reflects their Virginia taxable income. Accordingly, the Taxpayers are requested to file a Virginia part-year individual income tax return for the 2008 taxable year to more accurately reflect their Virginia income tax liability.

The return and payment for the corresponding liability should be mailed to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23218-7203, Attention: *. Once the return is received, it will be processed and the assessment will be adjusted accordingly. If such return is not filed within the allotted time, the assessment will be considered to be correct and collection action will resume.

The Code of Virginia sections and regulation 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 * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5084584615.D