I'm in the military and had combat-zone pay excluded from my federal income -- can I also claim Virginia's combat-pay subtraction on it?

Plain-English summary

A husband and wife filed a joint 2017 Virginia resident income tax return and claimed a "combat pay subtraction" for military pay the husband earned while deployed in a combat zone. Under audit, the Department disallowed the subtraction and assessed additional tax, and the Taxpayers appealed under Va. Code § 58.1-1821.

Virginia's tax starts with FAGI, and the subtraction only reaches income that's already in FAGI. Virginia Code § 58.1-301 conforms Virginia's income tax terminology to federal law, and Virginia taxable income begins with the taxpayer's federal adjusted gross income (FAGI). Virginia Code § 58.1-322.02 13 (formerly § 58.1-322 C 21) lets military personnel subtract pay attributable to combat-zone or hazardous-duty service, but only "to the extent included in FAGI."

The pay was never in FAGI to begin with. The husband's W-2 forms showed his combat-zone pay was federally excludable and was never included in the couple's FAGI. Because that income was never part of Virginia taxable income in the first place, there was nothing to subtract -- allowing the subtraction anyway would let the Taxpayers deduct the same income twice.

The rest of their return was fine. The Department noted it made no change to the Taxpayers' separate "basic pay subtraction," which correctly covered the portion of the husband's military pay that WAS included in FAGI. The assessment for 2017 was upheld.

What this means for you

Military members claiming a combat-pay subtraction

Check your W-2 first: if your combat-zone pay was already excluded from Box 1 federal wages (as combat pay typically is under federal law), it is not in your FAGI, and Virginia's combat-pay subtraction has nothing left to subtract for that portion of your pay. The subtraction only applies "to the extent included in FAGI."

Tax preparers and return preparers for military families

Distinguish between "basic pay" that IS included in FAGI (which can be subtracted under the military pay/combat-zone provisions if it qualifies) and combat-zone pay that is already federally excluded (which cannot also be subtracted on the Virginia return). Claiming both risks disallowance for double-counting.

Taxpayers appealing a Virginia individual income tax assessment under § 58.1-1821

This ruling shows the Department will look at the underlying W-2s and federal income figures to verify whether disputed income was actually included in FAGI before allowing a Virginia subtraction tied to that income.

Common questions

Q: I had combat-zone pay that was excluded from my federal income -- can I still subtract it on my Virginia return under the military combat-pay subtraction?
A: No. The Virginia subtraction under § 58.1-322.02 13 only applies to combat-zone pay "to the extent included in FAGI." If the pay was never included in FAGI because it was federally excluded, there's nothing left to subtract.

Q: Why does it matter whether my combat pay was included in FAGI?
A: Virginia's income tax starts with FAGI (Va. Code § 58.1-301). If income was never part of FAGI, it was never part of Virginia taxable income either, so subtracting it again would let the taxpayer deduct the same income twice.

Q: Did the Department change anything else on the Taxpayers' return?
A: No. The Department specifically noted that it left the Taxpayers' separate basic pay subtraction untouched, since that subtraction correctly covered the portion of military pay that was included in FAGI.

Q: What happens now that the assessment was upheld?
A: The Taxpayers were told they would receive an updated bill including accrued interest, and were instructed to pay the balance within 30 days to avoid additional interest.

Citations and references

• Va. Code § 58.1-301 -- Virginia's income tax terminology conforms to the Internal Revenue Code, and Virginia taxable income computation begins with federal adjusted gross income (FAGI).
• Va. Code § 58.1-322.02 13, formerly Va. Code § 58.1-322 C 21 -- allows military personnel to subtract military pay and allowances attributable to combat-zone or qualified hazardous-duty service, but only to the extent that pay is included in FAGI.
• P.D. 09-9, 09-105, 09-106, 09-124, 11-133, 12-210, 15-124, and 18-28 -- prior Department rulings addressing the same military-pay-subtraction and FAGI-inclusion issue.

Subject

Subtractions : Military - Combat Zone Pay Excluded from FAGI

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-123

Original ruling text

September 14, 2021

Re: § 58.1-1821 Appeal: 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 wife, filed a joint Virginia resident income tax return for the 2017 taxable year and claimed a combat pay subtraction. Under audit, the Department disallowed the subtraction and issued an assessment. The Taxpayers appealed, contending that they do not agree with the Department’s adjustments.

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 for 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 federal adjusted gross income (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 Chapter 3 of Title 58.1 of the Code of Virginia .

To the extent included in FAGI, Virginia Code § 58.1-322.02 13 (formerly Virginia Code § 58.1-322 C 21) allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. The Taxpayers assert that they were eligible to claim the subtraction because the husband earned income while deployed with the United States military in 2017. However, the W-2 forms provided by the Taxpayers show that the combat zone pay earned by the husband was not included in their FAGI. Allowing taxpayers to subtract income that is already not included in FAGI, and hence the computation of VTI, would effectively allow taxpayers to deduct the same income twice.

Accordingly, the Department was correct in disallowing the combat pay subtraction. The Taxpayers should be aware that no change was made to the basic pay subtraction they claimed, which fully accounted for the part of the husband’s military pay that was included in FAGI. Therefore, the assessment for the 2017 taxable year is upheld and remains due and payable. The Taxpayers will receive an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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/3754-C

Related Documents

09-9

09-105

09-106

09-124

11-133

12-210

15-124

18-28