Could a taxpayer who moved to Virginia in March claim an out-of-state tax credit on a full-year resident return without submitting the other state's return?

Subject

Part-year return required to substantiate other-state tax credit

Plain-English summary

A taxpayer who moved to Virginia in March should have filed a part-year return rather than a full-year resident return. Form 760PY would report income received during the Virginia-residency period and prorate the applicable exemptions and standard deduction.

Virginia residents can receive a credit for qualifying income tax paid to another state, generally limited to the lesser of the other state's tax or Virginia tax on the same income. But a part-year resident cannot claim the credit for tax paid to the former state on income earned while still a resident there.

Result: the taxpayer had 30 days to file Form 760PY and attach the other state's return. Virginia would then review and adjust the assessment; otherwise the assessment would remain correct and collection would resume.

What this means for you

• Use Form 760PY when you move into Virginia during the year.
• Report only the income attributable to the Virginia-residency period under the part-year rules.
• Attach the other state's return when claiming a credit for tax paid there.
• Do not claim a Virginia credit for tax on income earned while you were still domiciled in the former state.

Common questions

Q: Is every tax payment to the former state creditable after a move?

A: No. The credit does not cover tax attributable to income earned while the taxpayer was still a resident of that state.

Q: Did the ruling establish the final credit amount?

A: No. The Department required the corrected return and other-state return before recalculating the assessment.

Citations and references

• Va. Code §§ 58.1-303 and 58.1-332(A).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-158

Original ruling text

August 13, 2015

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, 2012.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2012 taxable year and claimed a credit for income tax paid to * (State A). Under review, the Department denied the credit because the Taxpayer had not submitted the State A return to substantiate the amount of credit claimed. The Taxpayer filed an appeal, contending he moved to Virginia from State A in March 2012.

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 she resides in Virginia. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes. See Public Document (P.D.) 14-67 (5/20/2014).

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income. As a general rule, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state.

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. See P.D. 13-28 (3/5/2013).

In this case, the Taxpayer believes the credit was denied because he mistakenly filed a Virginia resident return for the entire 2012 taxable year when he should have filed a part-year return. If he moved to Virginia in March 2012, the Taxpayer would be eligible to file a part-year return.

The Taxpayer, therefore, should file a part-year return (Form 760PY) for the 2012 taxable year and report only the income he received while residing in Virginia. If the Taxpayer claims a credit for tax paid to State A, he should also attach a copy of the State A return. The Taxpayer, however, should be aware that he would not be eligible to claim the credit to the extent the tax was attributable to income he earned while he was still a State A resident prior to March 2012.

The requested return should be filed within 30 days of the date of this letter and mailed to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23216-7203, Attention: *. Once the return is received, it will be reviewed 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 cited are available on-line at www.tax.virginia.gov in the Laws, Rules & 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/1-5992886100.M