Can a Virginia resident claim the foreign pension credit for withholding on returned foreign retirement contributions, and does following the tax form instructions protect them?

Plain-English summary

A married couple claimed Virginia's credit for foreign taxes paid on retirement income on their 2017 return, for withholding paid to another country (Country A) on money they received from Country A retirement accounts. The Department disallowed the credit and assessed tax, which it later collected. The couple appealed, saying they'd properly claimed the credit and had followed the tax-form instructions.

The Department upheld the assessment. The money was really wages, not retirement income, so the foreign pension credit didn't apply — and following the tax-form instructions didn't save the credit.

First, a procedural win: the appeal counted as a protective claim

Because the couple had already paid the assessment and asserted their rights within three years, the Department treated the appeal as a valid protective claim for refund under Va. Code § 58.1-1824. Since it didn't depend on a pending court case, the Department decided it on the merits under the normal appeal procedures. (So paying an assessment doesn't forfeit your right to contest it, if you file in time.)

Why the foreign pension credit didn't apply

Virginia's credit under Va. Code § 58.1-332.1 is narrow: it covers a foreign country's tax on pension or retirement income that is (1) included in your federal adjusted gross income (FAGI), (2) derived from past foreign employment, and (3) subject to Virginia tax. Its purpose is to relieve double taxation of genuine retirement income.

That's different from wages/compensation, which Va. Code § 58.1-302 defines as remuneration for personal services. Federal law agrees: "foreign earned income" under IRC § 911 excludes amounts "received as a pension or annuity."

The facts showed the money was compensation, not a pension:

• In Country A, foreign workers normally pay into a retirement program via salary deductions, but a Country A law lets qualifying foreign workers be exempt — and have their contributions returned.
• The couple's own federal return listed the income as "foreign earned" — contradicting a retirement-income label.
• The husband could have certified up front that he met the Country A law, in which case the contributions would never have been withheld and the income would plainly have been wages.

Because he simply got his own withheld wages back, treating those reimbursements as retirement income would be inconsistent with Virginia's conformity to federal law. So the credit was denied.

"But I followed the tax-form instructions"

The couple also argued they'd followed Virginia's return instructions. The Department rejected that as a defense: the instructions are general guidance, not a detailed statement of every nuance of the law, and cannot be relied on as authoritative. Taxpayers must look to the statutes, rulings, regulations, and court decisions to compute their tax correctly.

What this means for you

• The foreign pension credit is only for real retirement income. Wages taxed by a foreign country — even labeled or routed through a "retirement" program — don't qualify.
• How you reported it federally matters. Calling the income "foreign earned income" on your federal return undercuts a claim that it's a pension in Virginia.
• Tax-form instructions aren't authority. You can't rely on them to override the statute if the Department later disagrees.
• Paying an assessment preserves your appeal if you file a protective claim within three years — you don't have to leave the bill unpaid to fight it.

Common questions

Q: A foreign country taxed money from my "retirement" account. Do I automatically get Virginia's foreign pension credit?

A: Not automatically. The credit is only for genuine pension or retirement income. If the money was really returned wages or compensation, it doesn't qualify.

Q: I followed the Virginia tax-form instructions exactly. Doesn't that protect me?

A: No. The instructions are general guidance, not binding authority. The statutes control, and the Department can assess tax if the instructions were misapplied.

Q: I already paid the assessment. Can I still get a refund?

A: Yes, if you file a protective claim for refund within three years of the assessment. That's what let this couple have their appeal heard on the merits, even though they lost.

Citations and references

• Va. Code § 58.1-1824 — protective claim for refund within three years of an assessment
• Va. Code § 58.1-332.1 — credit for foreign tax on pension/retirement income included in FAGI
• Va. Code § 58.1-301 — Virginia conforms to Internal Revenue Code terminology
• Va. Code § 58.1-302 — definition of "compensation"
• IRC § 911 — "foreign earned income" excludes amounts received as a pension or annuity

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-102

Original ruling text

September 4, 2019

Re: § 58.1-1824 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 “Taxpayers”) for the taxable year ended December 31, 2017.

FACTS

The Taxpayers, a husband and a wife, filed a joint 2017 Virginia resident individual income tax return, claiming a credit for taxes paid on foreign source retirement income to * (Country A). The Department requested additional information to determine if the Taxpayers qualified for the credit. After reviewing the documentation provided, the Department issued an assessment for the 2017 taxable year. When the Taxpayers failed to pay the assessment, the Department satisfied the balance due through collection procedures. The Taxpayers appeal, contending that they properly claimed the credit in accordance with the tax form instructions.

DETERMINATION

Protective Claim

Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department to file a protective claim for refund within three years of the date of an assessment. A protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided upon its merits pursuant to Virginia Code § 58.1-1821. The Taxpayer satisfied the requirements of filing a protective claim by paying the assessment in full and asserting their rights within the statutory deadline. Because the protective claim does not involve facts or law which depend upon the resolution of a pending case, the Department will consider the claim on the merits pursuant to the administrative appeal procedures.

Foreign Source Retirement Income Credit

Virginia Code § 58.1-301 provides that 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. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income 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 § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in FAGI, derived from past employment in the foreign country, and subject to Virginia income tax. The intent of the credit is to grant Virginia residents relief in situations where they are taxed by both Virginia and a foreign country on these types of income during the same taxable year.

Foreign pension or retirement income differs from foreign earned income or compensation. Virginia Code § 58.1-302 defines “Compensation” as “wages, salaries, commissions and any other form of remuneration paid or accrued to employees for personal services.” Similarly, the IRC provides “[t]he term ‘foreign earned income’ with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual… Foreign earned income shall not include amounts received as a pension or annuity…” See IRC § 911.

As a general rule, foreign employees working in Country A must pay into a Country A retirement program through deductions in their salary. A Country A law grants foreign workers an exemption from these retirement contributions if certain conditions are met. Similarly, foreign workers who have been paying into Country A’s retirement system may be eligible to be reimbursed for their contributions if they meet the requirements of the exemption.

The Taxpayers contend that they are entitled to the credit provided in Virginia Code § 58.1-332.1 because they paid taxes to Country A on income they received from Country A retirement accounts. They explain that because they met the requirements of the Country A law, their retirement contributions were returned and they paid Country A withholding taxes on the income. As evidence of their eligibility to claim the credit, the Taxpayers provided a 2016 fourth quarter financial statement for their Country A retirement accounts, a Country A certificate of taxable income from April 2017, and a copy of the Country A law.

The Department, however, found that the Taxpayers did not provide sufficient evidence to show that the income in question was retirement income rather than wages. In fact, the Taxpayers’ federal return lists the income as “foreign earned,” which contradicts classifying the income as retirement income. The purpose of the Country A law also seems to indicate that the income was from wages. At first, the money was withheld to potentially provide retirement income, but because the husband qualified under the Country A law, his wages were returned to him. The Taxpayers acknowledge that the husband could have certified that he met the provisions of the Country A law before he signed an employment contract and Country A would not have withheld the retirement contributions from the husband’s wages. In that case, the income clearly would not qualify as retirement income pursuant to the credit at issue.

Tax Form Instructions

The Taxpayers also argue that they followed the tax return instructions in claiming the credit. The information provided in Virginia’s tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision or nuance of Virginia’s tax law. A taxpayer must consult Virginia’s statutes, ruling letters, regulations, court decisions, and other sources of Virginia’s tax jurisprudence in order to compute his or her Virginia tax liability correctly. The guidance provided in the Department’s tax form instructions is not a substitute for these sources of Virginia’s tax law and may not be relied upon as authoritative when a taxpayer is computing his or her Virginia taxable income.

CONCLUSION

Based on the evidence provided, the husband was eligible for an exemption from making contributions to Country A’s mandatory retirement system. If Country A had not withheld the contributions, the income clearly would be considered compensation from employment. However, because the Taxpayers failed to take advantage of an election, they are asking the Department to treat the reimbursements of the contributions as retirement income. To treat the reimbursements differently from compensation would be inconsistent with Virginia’s conformity to federal tax law. 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, and regulation 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/1933C