Could a part-year resident claim a Virginia credit for another state's tax on income earned while the taxpayer was a Virginia resident?

Plain-English summary

The taxpayer filed as a part-year Virginia resident for 2016 and claimed a credit for tax paid to State A. Virginia initially denied the credit.

Virginia found that some State A-source income was earned while the taxpayer was a Virginia resident and therefore was taxed by both states. The credit applied to that overlapping portion, but not to income attributable to the period of State A residency. The Department abated the assessment.

Citations and references

• Va. Code § 58.1-303
• Va. Code § 58.1-332 A
• P.D. 97-301 and P.D. 13-28

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-36

Original ruling text

March 26, 2018

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, 2016.

FACTS

The Taxpayer filed a Virginia part-year resident income tax return for the 2016 taxable year and claimed a credit for income tax paid to * (State A). Under review, the Department denied the credit and issued an assessment. The Taxpayer filed an appeal, contending that the credit should have been allowed because he paid taxes to State A on the same income that was subject to tax in Virginia.

DETERMINATION

Virginia Code § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period in which he or she is a Virginia resident and is taxed as a resident only for the portion of the year that he or she resides in Virginia.

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income.

As a general rule, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income. See Public Document (P.D.) 97-301 (7/7/1997).

Notwithstanding the provisions of Virginia Code § 58.1-322, Virginia 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. See P.D. 13-28 (3/5/2013).

The Taxpayer contends that the credit should be allowed because he was required to pay income tax to State A as a nonresident on income earned during his period of residency in Virginia. An analysis of the Virginia and State A returns indicates that a portion of the Taxpayer's income attributable to his period of Virginia residency was State A source income. As such, that portion of income was subject to tax in both states. Although the Taxpayer was not eligible for a credit for income tax paid to State A on income attributable to his State A residency, he was permitted to claim a credit for income tax paid to State A on the portion of his State A source income earned while a resident of Virginia. Accordingly, the assessment for the 2016 taxable year will be abated.

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/1522.A