Could a Virginia domiciliary who was also a District of Columbia actual resident claim a Virginia credit for District income tax?

Subject

As a domiciliary resident of Virginia and an actual resident of the District of Columbia, the wife was required to file a resident return in each jurisdiction.

Plain-English summary

A married Virginia couple claimed a credit for District of Columbia income tax paid by the wife. Virginia initially denied the credit by treating her as a District nonresident, who generally would not owe District individual income tax.

The wife, however, maintained a place of abode in the District for at least 183 days and filed a resident District return. She was therefore both a Virginia domiciliary resident and a District actual resident, with resident-return duties in both jurisdictions.

Under those facts, Va. Code § 58.1-332 did not prohibit a Virginia credit for District income tax. The credit was still limited to income derived from outside Virginia and otherwise taxed by Virginia.

The submitted returns did not clearly identify the qualifying non-Virginia income. Virginia gave the couple 30 days to file an amended return, a separate sourcing schedule, and supporting Forms W-2 or 1099 so the assessment could be adjusted as warranted.

Citations and references

• Va. Code §§ 58.1-332, 58.1-302, and 58.1-341 A 1.
• D.C. Code §§ 47-1801.04(42) and 47-1805.02(1).
• P.D. 15-208 and P.D. 15-89.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-41

Original ruling text

March 31, 2016

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 "Taxpayers") for the taxable year ended December 31, 2012.

FACTS

The Taxpayers, a husband and a wife and domiciliary residents of Virginia, filed a joint Virginia resident individual income tax return for the 2012 taxable year and claimed a credit for income tax paid to the District of Columbia. Under review, the Department denied the credit and issued an assessment. The Taxpayers appealed, contending that Virginia law allows them to claim a credit for income tax the wife paid to the District of Columbia as an actual resident.

DETERMINATION

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 or gain from the sale of a capital asset. This same statute provides that the credit "shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by subsection B of this section."

In denying the credit, the Department treated the wife as a nonresident of the District of Columbia. As a general rule, Virginia law does not allow a resident to claim a credit on his Virginia return for taxes paid to Arizona, California or Oregon because the law of those states allow a Virginia resident to claim the credit on the respective nonresident returns. Similarly, residents of Arizona, California and Oregon would claim credits for taxes paid to those states on their Virginia nonresident returns. In addition, the Department has observed that nonresidents of the District of Columbia are generally exempt from that jurisdiction's income tax, but may be subject to the unincorporated business franchise tax. See Public Document (P.D.) 15-208 (10/27/2015). For purposes of eligibility to claim a credit for taxes paid to another state, the unincorporated business franchise tax is not considered to be an income tax. See P.D. 15-89 (4/28/2015). Thus, Virginia residents who are nonresidents of the District of Columbia are not eligible to claim a credit for tax paid to the District of Columbia on their Virginia income tax returns because they do not pay income tax to the District of Columbia.

In this case, however, the Taxpayers filed a resident District of Columbia return, because they indicate the wife maintained a place of abode there for an aggregate of 183 days or more during the 2012 taxable year. Similar to Virginia, the District of Columbia defines a resident to include an individual who maintains a place of abode within its jurisdiction for an aggregate of 183 days or more during a taxable year. See D.C. Code § 47-1801.04 (42). Virginia deems such individuals to be actual residents. See Va. Code § 58.1-302.

As a domiciliary resident of Virginia and an actual resident of the District of Columbia, the wife was required to file a resident return in each jurisdiction. See Va. Code § 58.1-341 A 1 and D.C. Code § 47-1805.02 (1). Under such circumstances, Va. Code § 58.1-332 does not prohibit taxpayers from claiming a credit for income tax paid to the District of Columbia on their Virginia return. The credit, however, is subject to certain limitations described in Va. Code § 58.1-332, including that the income upon which the credit may be claimed must be "derived from sources outside the Commonwealth" and otherwise subject to Virginia income tax.

The returns submitted do not clearly show how much of the income the wife reported to the District of Columbia was from non-Virginia sources. The Taxpayers, therefore, should submit an amended return with a separate schedule indicating how much of the income reported to the District of Columbia was from non-Virginia sources. The Taxpayers should also submit any information return such as federal Form W-2 or 1099 that reported the wife's income. To the extent that amount is different than the amount of qualifying taxable income the Taxpayers first reported on their 2012 Virginia Schedule OSC (line 3), then the Taxpayers must correct that amount and, consequently, the amount of the credit claimed.

The Taxpayers should submit the requested return, schedule and information returns to Virginia Department of Taxation, P.O. Box 27203, Richmond, Virginia 23261- 7203, Attention: *, within 30 days of the date of this letter. They will be reviewed and the assessment will be adjusted, as warranted. If they are not submitted within the time allotted, the assessment will be considered to be correct and collection action will resume.

The Code of Virginia sections and public documents 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/1-6158525346.M