Could a Virginia resident who moved during the year claim a credit for tax paid to the new state on income earned before the move?

Subject

Virginia source income earned working from home.

Plain-English summary

A Virginia domiciliary moved to another state in June 2015. Before moving, she spent substantial time working in that state but also worked from her Virginia home. Both states taxed part of her pre-move income, and Virginia initially denied her claimed credit for tax paid to the other state.

Virginia allowed a credit for qualifying income earned in the other state while she remained a Virginia resident, because she paid the other state's tax as a nonresident and Virginia also taxed the income on a residency basis. The credit remained limited to the lesser of the other state's tax or Virginia tax imposed on that income.

Income earned while she worked from her Virginia home was Virginia-source income and did not qualify for the credit. Virginia ordered the assessment adjusted and a refund issued if the calculation warranted one.

What this means for you

• Separate income by where the work was performed before the change of domicile.
• The ruling allowed a credit only for income that the other state taxed as source income while Virginia taxed it because the taxpayer was still a resident.
• Work performed from a Virginia home was treated as Virginia-source income.

Citations and references

• Va. Code §§ 58.1-332 A, 58.1-303 A and B, and 58.1-302.
• P.D. 97-301.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-50

Original ruling text

April 6, 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 “Taxpayer”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayer, a domiciliary resident of Virginia, moved to * (State A) in June 2015. Prior to her move, she spent significant time in State A working for her employer. The Taxpayer filed a part-year Virginia resident income tax return and a State A nonresident/part-year resident income tax return for the 2015 taxable year. On her Virginia return, she claimed a credit for income tax paid to State A. The Department denied the credit and issued an assessment. The Taxpayer appealed, contending she was permitted to claim a credit for income tax paid to State A, at least with respect to the non-Virginia source income she earned prior to June 2015 that was taxed by both Virginia and State A.

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. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).

Notwithstanding the provisions of Va. Code § 58.1-332, Va. Code § 58.1-303 prohibits part-year residents from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. This restriction, however, is limited to taxpayers who move into Virginia during the taxable year. See Va. Code § 58.1-303 A.

Virginia Code § 58.1-303 B applies to taxpayers who begin a taxable year as a resident of Virginia but change their domicile during the year. The restriction described in Va. Code § 58.1-303 A does not apply to such taxpayers. Regardless, they would not be able to claim a credit on their part-year Virginia returns for tax paid on any income they earned after they changed their domicile to a different state or country, because no Virginia tax would be due on a residency basis on such income and any Virginia source income earned as a nonresident would not be eligible for the credit. See Va. Code § 58.1-332 A.

In this case, the Department denied the credit because the Taxpayer had already subtracted a portion of her income that was attributable to her period of Virginia residency in State A. It appeared, therefore, that the Taxpayer was attempting to claim a credit on her Virginia return against income that was only subject to Virginia income tax.

Because the Taxpayer, however, was already working in State A and thus had State A source income during that part of the year she remained a domiciliary resident of Virginia, the Taxpayer paid tax to State A as a nonresident. Under Va. Code § 58.1-332 A, she was eligible to claim credit for any tax paid to State A on income she was also subject to tax on in Virginia as a Virginia resident, to the extent the income was not Virginia source income and subject to the limitations otherwise described in Va. Code § 58.1-332 A. In this case, the income she earned while working from her Virginia home was Virginia source income. See Va. Code § 58.1-302.

An out-of-state tax credit will be allowed in accordance with this determination. The assessment will be adjusted, and a refund will be issued if warranted.

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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1025.M