What does Virginia Ruling of the Tax Commissioner P.D. 21-32 conclude about the credit for tax paid to another state when a couple is a dual resident of Virginia and another state?

Plain-English summary

A married couple filed joint Virginia resident income tax returns for 2017 and 2018 and claimed credits for income tax they also paid to another state (redacted in the ruling as "State A"), where they also filed resident returns for those same years -- a situation the ruling calls "dual residency." On audit, the Department denied the credits and assessed additional tax, and the couple appealed.

The Tax Commissioner sided with the couple and ordered the credits reinstated. The Department had denied the credits on two grounds: first, that the couple hadn't proven they were actually Virginia domiciliary residents entitled to the credit at all; and second, that they were "double dipping" by claiming credits for tax paid to other states on both their State A and Virginia returns.

On the first point, the ruling explains that the Department never made a formal inquiry or determination questioning the couple's Virginia residency, and never attempted the nonresident apportionment calculation that would have been needed if it actually treated them as Virginia nonresidents -- so this basis for denial had no support in the record.

On the second point, the ruling walks through a detailed numeric example to show that claiming credits for tax paid to other states on both dual-resident-state returns does not, by itself, add up to improper double dipping. When someone is a domiciliary resident of one state and simultaneously an "actual" (statutory) resident of another, Virginia law does not prohibit claiming a Virginia credit for tax paid to that other resident state, and separately does not prohibit claiming credit for tax paid to nonresident states on both resident-state returns. Whether the same credit was also claimed on the other state's resident return is irrelevant to whether it independently qualifies for the Virginia credit -- what matters is whether the underlying income is non-Virginia-source income that's otherwise subject to Virginia tax.

The couple backed this up with pro forma nonresident returns for both Virginia and State A, breaking down exactly which income was attributed to which state. That breakdown followed the approach the Department itself had laid out for dual residents in an earlier ruling, and it showed the couple had not claimed any State A credit for Virginia-source income. The Department returned the case to the original reviewer to reinstate the credits and adjust the assessments accordingly.

What this means for you

People who live, work, or own property in two states

If you're treated as a resident by two states in the same year -- for example, domiciled in one state but also meeting another state's statutory residency test (often a set number of days present there) -- claiming a credit for taxes paid to the other state on both of your resident returns is not automatically "double dipping." What matters is whether each credit you claim is tied to income that is genuinely sourced outside Virginia and otherwise taxable by Virginia, not which return(s) you also claimed a similar credit on.

Accountants and tax professionals handling multistate credit computations

This ruling reinforces that the Virginia credit under Va. Code § 58.1-332 A is capped at the lesser of (a) the tax actually paid to the other state, or (b) the Virginia tax actually imposed on that same income, and only applies to earned or business income "derived from sources outside the Commonwealth." Preparing pro forma nonresident returns for each state involved -- to show exactly which income is attributed to which state -- is the kind of documentation the Department will credit (as it did here) when defending a dual-resident credit claim on audit.

Auditors and reviewers

The ruling is also a caution against denying a credit-for-taxes-paid claim on a "double dipping" theory without actually working through the numbers. If a return is being reclassified from resident to nonresident (or vice versa), the reviewer needs to make the corresponding apportionment calculation and clearly communicate the basis for any resulting adjustment to the taxpayer.

Common questions

Q: Is it automatically "double dipping" to claim a credit for tax paid to another state on both that state's resident return and my Virginia resident return?
A: No. The ruling holds that dual residents can properly claim a credit on both returns, as long as the credit on each return is tied to income that qualifies for that state's credit computation and isn't Virginia-source income being credited twice.

Q: What income qualifies for the Virginia credit for tax paid to another state?
A: Under Va. Code § 58.1-332 A, only earned or business income that is "derived from sources outside the Commonwealth" and otherwise subject to Virginia tax. The credit is capped at the lesser of the tax actually paid to the other state or the Virginia tax actually imposed on that same income.

Q: What if the Department wants to treat me as a nonresident instead of a resident?
A: The ruling notes that if the Department changes a taxpayer's residency status, it must consider all statutory filing requirements for the new status and make the corresponding adjustments (such as a nonresident apportionment calculation) -- not just deny credits without doing that analysis.

Q: What proof helped the taxpayers here?
A: Pro forma nonresident returns for both Virginia and the other state, showing exactly how their income was sourced and confirming they hadn't claimed a credit against the other state for Virginia-source income.

Citations and references

Statutes and public documents cited:

• Va. Code § 58.1-332 A (credit for income tax paid to another state; earned/business income only; capped at lesser of tax paid or Virginia tax on that income; income must be "derived from sources outside the Commonwealth")
• P.D. 97-301 (7/7/1997) (credit limited to the lesser of tax paid to the other state or Virginia tax imposed on that income)
• P.D. 16-41 (3/31/2016) (dual residents may claim a Virginia credit for tax paid to the other resident state; approach for breaking down income by source)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-32

Original ruling text

March 15, 2021

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 assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2017 and 2018.

FACTS

The Taxpayers, a husband and a wife, filed joint Virginia resident income tax returns for the 2017 and 2018 taxable years, claiming credits for income tax paid to other states. A portion of the credits claimed on their Virginia returns was attributable to income tax paid to * (State A), a state where the Taxpayers also filed resident returns for the taxable years at issue. Under review, the Department denied the credits and issued assessments. The Taxpayers appeal, contending that they properly claimed the credits in accordance with Virginia law.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The credit is also subject to the further limitation that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax. See Virginia Code § 58.1-332 A. Thus, a Virginia resident taxpayer may not claim credit on their Virginia income tax return for income tax paid to another state on Virginia source income.

The assessments that the Department issued arose out of Virginia resident income tax returns the Taxpayers filed. It appears that the Department denied the credits on two bases: 1) that the Taxpayers had not proven that they were domiciliary residents of Virginia entitled to claim the credits; and 2) that the Taxpayers were improperly “double dipping” by claiming credits for income tax paid to other states on both their State A and Virginia returns.

The Taxpayers assert they were domiciliary residents of Virginia for the 2017 and 2018 taxable years and indicated their intent by filing resident returns. It does not appear that the Department made a formal inquiry or determination as to the Taxpayers’ residency status. Further, despite having return information from other states, the reviewers failed to make any attempt to determine a nonresident apportionment ratio that would be required if the Taxpayers were deemed nonresidents. When the Department initiates a change of residency on a taxpayer’s return, it must consider all of the statutory requirements for filing a return under the new residency status and make all necessary adjustments based on the information available.

The fact that the Taxpayers claimed credits on both their Virginia and State A returns does not necessarily mean that the Taxpayers could not claim them on their Virginia returns. The following simplified example illustrates credits for taxes paid to other states when a taxpayer is a domiciliary resident of one state and an actual resident of another state (commonly called “dual residency”).

Assume taxpayer is a resident of both Virginia and State B. For simplicity, also assume that the taxpayer filed nonresident returns in States C and D in which only her State C and D source income was subject to tax. In addition, assume that all the state’s tax uniformity at a 5% rate:

Income

Virginia Source Income

$100

State B Source Income

$200

State C Source Income

$200

State D Source Income

$300

No State Source

$200

Total Income

$1000

Virgina Resident Return

Total Income

$1000

Total Virginia Tax

$50

Less State B Credit

($10)

Less State C Credit

($10)

Less State D Credit

($15)

Payable Virginia Tax

$15

State B Resident Return

Total Income

$1000

Total State B Tax

$50

Less State A Credit

($15)

Less State C Credit

($10)

Less State D Credit

($15)

Payable State B Tax

$10

In this simplified example, if the taxpayer had $1000 of income and no credit available from any other state, she would have owed $50 in State A tax. Taking into account the other state income for which she could claim credits for tax paid, she would be left with $100 of State A source income plus $200 of income not otherwise subject to a credit, for a payable tax of $15 on that $300 amount of income. Next, consider the State B return.

The final result is that the taxpayer paid $15 to State A, $10 to State B, $10 to State C and $15 to State D, for a total of $50 tax paid to all states. This was the same amount of tax that would have been due had all the income simply been subject to tax in State A without any credits. This example illustrates, therefore, that “double dipping” of credits in a dual residency scenario does not necessarily occur when a taxpayer claims credit for tax paid to one resident state on the other resident state’s return or when the taxpayer claims the same credit for tax paid to nonresident states on both resident returns.

When taxpayers are dual residents, Virginia Code § 58.1-332 does not prohibit taxpayers from claiming a credit for income tax paid to the other state on their Virginia return. See P.D. 16-41 (3/31/2016). The statute also does not prohibit a taxpayer from claiming a credit for income tax paid to nonresident states on both resident state returns. If a taxpayer was required to pay income tax on a nonresident’s state source income, then in determining whether that tax qualified for a Virginia resident credit under Virginia Code § 58.1-332, whether the taxpayer claimed that credit on another state’s resident return is irrelevant. The credit, however, is subject to certain limitations described in Virginia Code § 58.1-332, including that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax.

With their appeal, the Taxpayers have provided pro forma nonresident returns for both Virginia and State A to demonstrate the amount of credits they claimed that were attributable to each state on the other state’s resident return. This breakdown of income by source is consistent with the instruction the Department gave the dual resident taxpayers in P.D. 16-41 and demonstrates that they have not attempted to claim a credit for income tax paid to State A on any income from Virginia sources.

The case, therefore, will be returned to the reviewer in order to reinstate the credits consistent with this determination and adjust the assessments accordingly. If a review of the Taxpayers’ specific computations has not already been conducted, the unit may perform such a review and make any adjustments to the credits that the review would warrant. If any such adjustments are made, the basis for them must be clearly communicated to the Taxpayers. At that point, if any balances remain due on the assessments, the Taxpayers will have 90 days from the date revised bills are issued in which to appeal any further adjustments that were made.

The Code of Virginia sections and public document 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/3464.M

Related Documents

97-301

16-41