Could Virginia residents subtract an entire IRA distribution because contributions may have been taxed by another state?

Subject

Subtraction for income received from a qualified pension plan.

Plain-English summary

Virginia did not allow a married couple to subtract the husband's entire 2012 IRA distribution. Section 58.1-322 C 19 applied only when contributions were federally deductible but still taxed by another state, and only the properly calculated portion of the distribution qualified.

The Department used a pro-rata formula based on previously taxed contributions, the account's year-end value, and annual distributions. The couple supplied a portfolio statement but no 2012 year-end balance and no proof that State A had taxed contributions excluded from federal income.

The assessment therefore remained correct, subject to one final 30-day opportunity to provide pay records, investment records, state returns, and the values needed to calculate the subtraction.

Citations and references

• Va. Code §§ 58.1-322 C 19 and 58.1-205.
• P.D. 10-214 and P.D. 15-69.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-149

Original ruling text

August 24, 2017

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 . I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2012 taxable year. The Taxpayers claimed a subtraction for the full amount of distributions received from the husband's individual retirement account (IRA). The Department disallowed the subtraction and issued an assessment. The Taxpayers filed an appeal, contending the contributions to the IRA were subject to state income tax when they lived in * (State A) and qualify for the subtraction under Va. Code § 58.1-322 C 19.

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 federal adjusted gross income (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 § 58.1-322 C 19 provides a subtraction for any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by IRC § 401, an individual retirement account or annuity established under IRC § 408, a deferred compensation plan as defined by IRC § 457, or any federal government retirement program, the contributions to which were deductible from the taxpayer's federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state. Before taxpayers are permitted to subtract any portion of their retirement income, contributions to the retirement plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must still have been subject to income tax in another state.

In P.D. 10-214, the Department established a pro-rata approach that accurately reflects the nature of a distribution from a retirement plan. Accordingly, a taxpayer who receives a distribution from a retirement plan as described in Va. Code § 58.1-322 C 19, and whose contributions to such plan were subject to income taxation in another state would determine the portion of the annual distribution(s) eligible for the subtraction by multiplying the total amount of the annual distribution(s) by a ratio equal to the total balance of previously taxed contributions divided by the sum of the value of the retirement account at the end of the taxable year plus the total amount of the annual distribution(s).

In P.D. 15-69 (4/15/2015), the Department provides examples of documents that may be used to calculate the subtraction. Such documents may include, but is not limited to, paystubs detailing contribution amounts, annual investment records and tax returns filed in the state where the contributions were made. In any case, the Department requires evidence that the contributions were taxed in the other state.

The Taxpayers provided a portfolio activity statement, showing contributions and withdrawals from June 2011 to December 2014. The documentation does not show the balance of the IRA account for the 2012 taxable year. Further, the Taxpayers have provided no evidence to show the income was excluded from FAGI and added back to the State A's income tax return.

Under the provisions of Va. Code § 58.1-205, an assessment of a tax by the Department is deemed prima facie correct. As such, the burden of proof is on the Taxpayers to show they were not subject to income tax in Virginia. Accordingly, the Taxpayers must provide sufficient documentation showing the previously taxed contributions, the value of the retirement account at the end of the taxable years the subtraction is claimed, and the total annual distribution for the year.

Absent of the necessary documents required to substantiate and calculate the pretaxed pension contributions claimed for the 2012 taxable year, the assessment must be upheld. The Taxpayers, however, will be granted one last opportunity to provide the information required to prove the pension contributions were previously taxed in State A and all aforementioned documents to properly compute the subtraction. Please send the requested information to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *. If sufficient documentation is not provided within 30 days from the date of this letter, the assessments will be upheld and an updated bill will be issued with interest accrued to date.

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/648.D