May part-year Virginia residents exclude income earned before moving to Virginia when calculating the credit for low-income individuals?

Plain-English summary

The Virginia Tax Commissioner held that part-year residents must include income earned before or after their Virginia residency period when computing family Virginia adjusted gross income for the credit for low-income individuals.

The credit under Va. Code § 58.1-339.8 was available when family Virginia adjusted gross income was at or below the applicable federal poverty-guideline amount and equaled $300 for the taxpayer and each qualifying dependent. For this calculation, Virginia adjusted gross income used the definition in Va. Code § 58.1-321: federal adjusted gross income with only the Virginia additions and subtractions authorized by §§ 58.1-322.01 and 58.1-322.02.

A part-year resident's federal adjusted gross income still includes income earned outside the Virginia residency period. Because the low-income-credit statute did not authorize subtracting that income, the taxpayers could not remove it when testing eligibility.

The Commissioner also explained the policy concern: allowing the subtraction could let a high-income taxpayer qualify merely by timing a move so that only a small portion of annual income was earned while a Virginia resident. The credit was intended for low-income taxpayers, not taxpayers whose total income was high but concentrated outside the Virginia residency period. The assessment was upheld.

What this means for you

People moving into or out of Virginia

The income used to compute a particular Virginia credit may differ from the income ultimately taxed by Virginia. For this low-income credit, use full federal adjusted gross income subject only to the specifically authorized Virginia modifications.

Married couples and families

The test uses combined family Virginia adjusted gross income, including the taxpayer, spouse, and persons claimed as dependents as defined in the statute.

Common questions

Q: Can I remove wages earned before I became a Virginia resident?
A: Not for this credit's family-income calculation. The statute did not authorize that deduction.

Q: Why does the computation start with full federal adjusted gross income?
A: Va. Code § 58.1-339.8 incorporates the Virginia adjusted gross income definition in § 58.1-321, which begins with federal adjusted gross income.

Q: What was the result?
A: The Department denied the credit and upheld the already-paid assessment.

Citations and references

• Va. Code § 58.1-339.8 (credit and family-income definition)
• Va. Code § 58.1-321 (Virginia adjusted gross income)
• Va. Code §§ 58.1-322.01 and 58.1-322.02 (authorized additions and subtractions)
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, 1 Va. Cir. 382 (1983) (strict construction of credits and deductions)

Subject

Low Income and Part-Year Residents

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-219

Original ruling text

December 28, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the assessment of individual income tax issued to * (the “Taxpayers”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayers filed a part-year resident individual income tax return for the 2016 taxable year and claimed the credit for low income individuals (the “Credit”). Under review, the Department denied the credit and issued an assessment. The Taxpayers appealed, contending they were permitted to subtract income earned during the period of residency outside of Virginia for the purposes of computing the Credit.

DETERMINATION

Pursuant to Virginia Code § 58.1-339.8, taxpayers with a family Virginia adjusted gross income at or below the corresponding amount listed in the federal poverty guidelines may claim a Virginia income tax credit equal to $300 each for themselves and any dependents claimed on their Virginia income tax return. For purposes of the Credit, “family Virginia adjusted gross income” is defined as “the combined Virginia adjusted gross income of an individual, the individual’s spouse, and any person claimed as a dependent on the individual’s or his spouse’s income tax return for the taxable year.” In addition, Virginia adjusted gross income “has the same meaning as the term is defined in § 58.1-321” for purposes of the Credit. See Virginia Code § 58.1-339.8.

The Taxpayers argue Virginia’s statutes do not set forth a computation of family Virginia adjusted gross income for part-year residents nor preclude a deduction for the nonresident portion of a part-year resident’s income. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell’s Motor Freight, Inc., at al. v. Virginia Department of Taxation , 1 Va. Cir. 382 (1983). Virginia adjusted gross income is defined in Virginia Code § 58.1-321 as “federal adjusted gross income for the taxable years with the modifications specified in §§ 58.1-322.01 and 58.1-322.02,” pertaining to certain additions and subtractions to FAGI not at issue in this case.

For part-year residents, income earned outside the period of Virginia residency is still included in a taxpayer’s FAGI, and Virginia Code § 58.1-339.8 does not allow a deduction for such income for purposes of computing the Credit. The form instructions for part-year resident income tax returns are consistent with the statute in that the computation worksheet starts with FAGI and provides lines to add or subtract income as required under the provisions of Virginia Code §§ 58.1-322.01 and 58.1-322.02. Therefore, the Taxpayers were not permitted to deduct income earned outside of their period of Virginia residency for purposes of computing the Credit.

In addition, it would violate the public policy of the Credit to allow part-year residents to deduct income earned outside of their period of Virginia residency. High income taxpayers could obtain the benefit of the Credit merely because of the timing of their moves. For example, most of a high income taxpayer’s income for a given taxable year could be attributable to a period of residence outside Virginia, such that he could be eligible for the Credit based solely on the smaller amount of income he earned after becoming a Virginia resident. The Credit, however, is intended to provide tax relief to low income taxpayers, not high income taxpayers who could benefit from the favorable timing of a move.

Accordingly, the assessment is upheld. The Department’s records indicate that the assessment has already been paid. Therefore, no further action is required.

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/1828.M