Could Virginia residents claim a Virginia credit for California tax when their California return did not actually impose alternative minimum tax?

Subject

Residency, Credit for Tax Paid to Another State

Plain-English summary

A married Virginia couple claimed a credit on their 2013 Virginia resident return for income tax paid to California. They argued Virginia should allow the credit to the extent California's alternative minimum tax rules prevented them from using the full credit for Virginia tax on their California nonresident return.

Virginia upheld the assessment. The California return showed that the couple's tentative minimum tax was below their regular tax, so no California alternative minimum tax was imposed. The Department also concluded that California law allowed the credit for taxes paid to Virginia to reduce California liability below the tentative minimum tax.

The couple had limited the California credit to the difference between regular tax and tentative minimum tax, then claimed the tentative-minimum-tax amount as a Virginia credit for California tax. Because the California credit could be used below that threshold, Virginia found no basis for the second credit.

What this means for you

• Virginia and California generally place the reciprocal credit on the nonresident return, not both returns.
• A claimed California AMT limitation must reflect AMT actually imposed on the filed return.
• Review how California's other-state credit interacts with tentative minimum tax before claiming a Virginia exception.

Common questions

Q: Did the taxpayers actually pay California alternative minimum tax?

A: No. Their tentative minimum tax was less than regular tax, so the return imposed no AMT.

Q: Could the California credit for Virginia tax reduce liability below tentative minimum tax?

A: The Department concluded that it could under Cal. Rev. & Tax. Code § 17039(c)(1)(Y).

Q: What was the outcome?

A: The Virginia assessment was upheld, with additional interest accruing until payment.

Citations and references

• Va. Code § 58.1-332 A and B.
• Cal. Rev. & Tax. Code §§ 18002(5), 17062(a), and 17039(c)(1)(Y).
• P.D. 94-355, P.D. 97-98, and P.D. 07-207.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-168

Original ruling text

September 19, 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, 2013.

FACTS

The Taxpayers, a husband and wife, filed a joint resident Virginia income tax return for the 2013 taxable year and claimed a credit for income tax paid to California. In January 2015, they filed an amended return, reducing the amount of credit claimed for income tax paid to California and paid the additional liability. Under review, the Department denied the remainder of the credit claimed and issued an assessment. The Taxpayers appealed, contending the amount of credit they claimed on the amended return was correct because they were not permitted to claim the full amount of Virginia income tax paid as a credit on their California nonresident return.

DETERMINATION

Generally, Va. Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. This code section further states:

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.

Under Va. Code § 58.1-332 B, a nonresident is permitted to claim a credit against tax on income from Virginia sources when their state of residency provides a substantially similar credit to Virginia residents or imposes a tax upon their income derived from Virginia sources but does not tax income earned in the state by Virginia residents. Because it is dependent on another state granting a similar or reciprocal credit, it may be limited by the credit permitted by the other state. Currently, only residents of Arizona, California, Oregon, and the District of Columbia may qualify for this credit.

Virginia law generally does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on the California nonresident return. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return.

Under certain circumstances, the Department has permitted a credit for income tax paid to California. See Public Document (P.D.) 97-98 (2/24/1998) and P.D. 07-207 (12/5/2007). The Department has also addressed a number of issues under which the out-of-state credit would not be permitted. See P.D. 95-175 (6/28/1995), P.D. 12-156 (10/04/2012) and P.D. 13-118 (6/27/2013).

In P.D. 94-355 (11/23/1994), the Department determined that when a reciprocity state does not allow credit on a nonresident return for individual income tax paid to another state, the individual may claim the credit on the Virginia resident income tax return. Pursuant to Cal. Rev. & Tax. Code § 18002 (5), California nonresidents may not claim a credit for income tax paid to their states of residence against California's alternative minimum tax (AMT).

The Taxpayers contend that Virginia should allow the credit for income tax paid to California, to the extent they were not able to claim the credit on their California return because of the AMT limitation. The Department has carefully reviewed the Taxpayers' California return and found that the Taxpayers did not pay the California AMT. The AMT is defined as “a tax equal to the excess, if any, of (1) The tentative minimum tax for the taxable year, over (2) The regular tax for the taxable year.” See Cal. Rev. & Tax. Code § 17062(a). Because the Taxpayers’ tentative minimum tax (TMT) was less than their regular tax, no AMT was imposed. This fact is reflected on the Taxpayers’ 2013 California return.

It appears the Taxpayers were effectively treating the credit for income tax paid to Virginia as a credit that could not be used to reduce their liability below the TMT. Credits for taxes paid to other states appear to be allowed to reduce the liability below the TMT pursuant to Cal. Rev. & Tax. Code § 17039(c)(1)(Y).

On their 2013 California nonresident return, the Taxpayers claimed an amount of credit for income tax paid to Virginia that was equal to the difference between their total California tax (less the exemption credit) and the TMT. The Taxpayers then claimed the amount of the TMT as a credit on their Virginia resident return. Because the credit for income tax paid to Virginia was allowed to reduce the Taxpayers’ California tax liability below the TMT, the Department properly disallowed the credit for income tax paid to California on the Taxpayers’ Virginia return.

Therefore, the assessment is upheld. The Taxpayers will receive an updated bill which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

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/1229.M