Was Virginia tax computed on a retirement distribution before subtracting federal income tax withheld?

Plain-English summary

The IRS increased the taxpayer's 2014 federal adjusted gross income by the amount of a retirement-plan distribution. Virginia then assessed additional tax because the taxpayer had not reported the federal change. The taxpayer argued that Virginia should tax only the amount remaining after federal income tax withholding.

Virginia held that the full distribution, including the withheld amount, was included in federal adjusted gross income and therefore entered Virginia taxable income. No Virginia deduction applied for federal tax withheld from the retirement distribution, so the assessment based on the gross amount was upheld.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322.01 through 58.1-322.04, 58.1-311, and 58.1-312 A 3
• P.D. 11-107 and P.D. 17-144

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-52

Original ruling text

April 16, 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, 2014.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer failed to include a distribution from a retirement account in federal adjusted gross income (FAGI) on his federal individual income tax return for the 2014 taxable year. Because the Taxpayer had not filed an amended Virginia income tax return to report the federal change, an assessment was issued for additional tax due. The Taxpayer filed an appeal, contending that federal income tax was deducted from the distribution.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with FAGI. Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-322.01 through § 58.1-322.04.

Virginia Code § 58.1-311 requires an individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If a taxpayer fails to file an amended return, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination. See Public Document (P.D.) 11-107 (6/14/2011). The Department adjusted the Taxpayer's 2014 Virginia income tax return based on federal information available from the IRS as permitted by statute. The IRS increased the Taxpayer's FAGI by the amount of a retirement plan distribution the Taxpayer received in 2014. The Taxpayer asserts that his VTI should only have been increased by the net amount of the distribution, after federal income tax had been withheld.

The entire amount of the distribution, including the amount of federal income tax withheld, was included in FAGI and thus was subject to Virginia income tax. For purposes of computing VTI, Virginia law does not provide for a deduction for federal income tax withheld on a distribution from a retirement plan. See P.D. 17-144 (8/23/2017). As such, Virginia income tax was properly computed based on the amount of the gross, rather than the net, distribution.

Therefore, the assessment is upheld. The Taxpayer will receive an updated bill, which will include accrued interest to date. The Taxpayer 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/1530.A