Could a Virginia resident claim all joint mortgage-interest and property-tax deductions when payments came from an account shared with a nonresident spouse?

Plain-English summary

Virginia upheld proportional allocation of mortgage-interest and property-tax deductions between a resident and nonresident spouse. They paid the expenses from a joint account containing both spouses' funds.

The resident's income and military housing allowance may have been sufficient to cover the bills, but he could not trace the actual payments to his separate income. The regulation therefore required allocation by the spouses' respective income.

Common questions

Was sufficient personal income enough to claim every deduction? No.

Why did the housing allowance not control? It was commingled with the spouse's funds.

Citations and references

• Va. Code § 58.1-326
• 23 VAC 10-110-190 B
• P.D. 95-251

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-134

Original ruling text

July 11, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2008. I apologize for the delay in the Department’s response.

FACTS

The Taxpayer, a resident of Virginia, was married to a nonresident of Virginia. The couple filed a joint federal income tax return, and the Taxpayer filed a separate Virginia income tax return. The Taxpayer’s spouse did not file a Virginia return. The Taxpayer claimed a majority of the itemized deductions reported on the joint federal income tax return in computing his Virginia taxable income.

Under audit, the Department adjusted the Taxpayer’s itemized deductions to reflect the Taxpayer’s percentage of the couple’s joint income and issued an assessment. The Taxpayer appeals the assessment, contending he was entitled to claim deductions for the entire mortgage interest expense and property tax paid because his Basic Allowance for Housing (BAH) provided sufficient income to pay the mortgage and property tax.

DETERMINATION

V irginia Code § 58.1-326 states, “if husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents.”

In cases where a Virginia resident and nonresident spouse file separate state income tax returns, Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, deductions must be proportionally allocated between each spouse based upon the income attributable to each. See also Public Document (P.D.) 95-251 (9/29/1995).

The Taxpayer concedes that he used a joint checking account to make the mortgage and property tax payments. The Taxpayer also concedes that tracing his income to the payments is not possible. The Taxpayer, however, argues that it was appropriate to allocate the deduction entirely to him because his income was sufficient to cover the payments. The Taxpayer also argues that he has proven separate accounting because his Basic Allowance for Housing (BAH) was sufficient by itself to cover the payments.

BAH is an allowance to offset the cost of housing when a military service member does not receive government-provided housing. BAH depends on location, pay grade and whether the service member has dependents. Service members receive BAH at a set rate, independent of their actual housing expenses, and it does not appear that they are required to account for their use of BAH once received.

The Taxpayer concedes that his income, including his BAH, was commingled with his spouse’s and used to make mortgage and property tax payments. The Taxpayer, therefore, is unable to demonstrate the separate accounting of such payments as required by regulation. Accordingly, the Department’s adjustment to the Taxpayer’s itemized deductions is upheld.

Accordingly, the 2008 assessment is due and payable in accordance with the enclosed schedule. Please remit payment and include a copy of the schedule to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203 Attn: *. Payment should be made within 30 days of the date of the revised bill to avoid the accrual of additional interest.

The Code of Virginia sections, regulation 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/516C