Did foreign tax withholding statements prove that a payment was pension income eligible for Virginia's foreign retirement-income tax credit?

Subject

Credit for income tax paid on retirement income earned in a foreign country

Plain-English summary

A married couple claimed Virginia's credit for foreign income tax paid on the husband's alleged pension from a former employer in another country. The foreign country did not require an income tax return, so the couple supplied spreadsheets and a January pay summary showing tax withheld.

Virginia agreed that the documents showed foreign withholding, but they did not establish that the underlying income was a pension, retirement payment, or annuity from past employment. That distinction mattered because Va. Code § 58.1-332.1 applied only to qualifying pension or retirement income taxed by both Virginia and the foreign country in the same year.

Because an assessment was presumed correct and the couple did not prove the character of the income, the Department denied the credit and refund.

What this means for you

• Foreign tax withholding alone does not establish eligibility for the retirement-income credit.
• Document that the payment is pension or retirement income derived from past foreign employment.
• Show that the income was included in federal adjusted gross income and subject to Virginia tax.
• When no foreign return is required, obtain other official records that identify the payment's character.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-332.1, and 58.1-205.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-130

Original ruling text

July 19, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which * (the “Taxpayers”) request a refund of individual income tax paid for the taxable year ended December 31, 2012. 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 2012 taxable year claiming a credit for income tax paid on retirement income earned by the husband in * (Country A). Under audit, the Department disallowed the credit because the Taxpayers could not show that the husband's income was retirement income. The Taxpayers paid the assessment and filed an appeal, contending that they could claim the credit because the husband's income was pension income earned from prior work for a Country A employer.

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 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.

Virginia Code § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in federal adjusted gross income, derived from past employment in the foreign country and subject to Virginia income tax. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and a foreign country on these types of income during the same taxable year.

The Taxpayers contend that Country A withheld the equivalent of federal, state and Social Security taxes from the husband's monthly pension checks he received from his employer located in Country A. The Department requested a tax return from Country A or other documentation to show that the income from which tax was withheld was retirement income.

The Taxpayers are unable to provide a copy of an income tax return because Country A does not have a filing requirement. The Taxpayers did provide spreadsheets showing the breakdown of tax withheld for an annuity for each monthly paycheck of the taxable year. They also provided a paycheck summary from the husband's employer for January 2012 that shows income tax being withheld from his paycheck.

Virginia Code § 58.1-205 provides that in 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 to show they were entitled to claim the credit.

The January paycheck summary from the husband's employer reports income tax withheld from the husband's income. The spreadsheets appear to have been made by the Taxpayers and show income tax was withheld from an annuity. While the documentation shows that tax was withheld from income by a Country A employer, it does not show that the income was retirement income. Accordingly, the Taxpayers' request for a refund of income tax paid to Virginia for the 2012 taxable year is denied.

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/1308.B