Was a federal Civil Service Retirement System annuity exempt from Virginia income tax like Social Security benefits?

Subject

Civil Service Retirement System

Plain-English summary

A retired federal employee received a Civil Service Retirement System annuity but no Social Security benefits because she had not paid Social Security tax during federal employment. She asked Virginia to treat the CSRS annuity like exempt Social Security.

Virginia declined. Va. Code § 58.1-322 C 4 subtracted Social Security benefits and other benefits included in federal adjusted gross income solely under IRC § 86. It did not provide an equivalent subtraction for CSRS retirement income. A Virginia court had also rejected the argument that this difference unlawfully discriminated against federal retirees based on the source of their compensation.

The CSRS annuity therefore remained in Virginia taxable income to the extent included federally. The ruling noted that the retiree might qualify for other provisions, including the then-applicable income-limited age deduction for qualifying taxpayers age 65 or older.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-322 C 4, and 58.1-322 D 5.
• IRC § 86 and 4 U.S.C. § 111, as cited in the ruling.
• Karl Edward Beisel v. Virginia Department of Taxation and Craig Burns, Chesapeake Circuit Court Case No. CL 15-2, reported as P.D. 16-7, as cited in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-180

Original ruling text

September 6, 2016

Re: Ruling Request: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of your client, * (the “Taxpayer”), regarding whether her retirement income from the federal Civil Service Retirement System (CSRS) is exempt from Virginia income taxation.

FACTS

While she was employed by the federal government, the Taxpayer contributed to the CSRS but was not required to pay Social Security taxes. The Taxpayer is now retired. She receives an annuity from the CSRS but is not eligible for Social Security benefits. The Taxpayer requests a ruling regarding whether her CSRS retirement benefits are exempt from Virginia income tax similar to the exemption for Social Security benefits under Va. Code § 58.1-322 C 4.

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 FAGI. Income properly 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.

Under Va. Code § 58.1-322 C 4, the amount of any Social Security benefits received under Title II of the Social Security Act and any other benefits included in FAGI solely by virtue of IRC § 86 may be subtracted from FAGI in computing Virginia taxable income. Virginia Code § 58.1-322 does not provide for an equivalent subtraction for benefits received by CSRS retirees.

In addition, a Virginia court has held that a lack of an equivalent subtraction does not discriminate against federal CSRS employees based on the source of their pay or compensation, as prohibited by Title 4 U.S.C. § 111. In that case, the Department's demurrer was sustained and the case was dismissed with prejudice. See Karl Edward Beisel v. The Virginia Department of Taxation and Craig Burns , Circuit Court of the City of Chesapeake, Case No. CL 15-2, the order for which was reported as Public Document (P.D.) 16-7 (2/23/2016). The plaintiff subsequently appealed to the Supreme Court of Virginia. The Court, however, refused the petition for appeal, ruling that there was no reversible error in the circuit court's judgment. See SCV record #151221 (11/19/2015). Accordingly, to the extent the Taxpayer's CSRS annuity income is included in FAGI, it is must also be included in the computation of Virginia taxable income.

The Taxpayer should be aware, however, that she may be eligible for other credits, deductions or exemptions depending on her specific circumstances. For example, Va. Code § 58.1-322 D 5 provides a deduction to the extent included in the FAGI in the amount of $12,000 for individuals born after January 1, 1939, and have attained the age of 65. This age deduction is reduced by $1 for every $1 that the taxpayer's adjusted Virginia FAGI exceeds $50,000 for single taxpayers and $75,000 for married taxpayers. For the purpose of the age deduction, “adjusted federal adjusted gross income” means federal adjusted gross income minus any benefits received under Title II of the Social Security Act and other benefits subject to federal income taxation solely pursuant to IRC § 86.

The Code of Virginia sections and public document 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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6346796258.M