My employer withheld Maryland income tax from my wages even though I live in Virginia -- can I claim a Virginia credit for the Maryland tax withheld?

Plain-English summary

A Virginia resident worked for an employer in Maryland and had Maryland income tax withheld from her wages. On her Virginia resident return, she claimed a tax credit for the Maryland tax paid. During an audit, she provided her Maryland nonresident return, which showed her employer HAD withheld Maryland tax but that she'd requested a full refund of it. The Department denied her Virginia credit and issued an assessment; she appealed.

Virginia's reciprocity agreements. Virginia is authorized to enter reciprocal agreements with other states so that residents commuting across the border for work aren't taxed twice -- Virginia currently has this kind of agreement with Maryland, West Virginia, and Pennsylvania. Under the Virginia-Maryland agreement specifically, a Virginia resident who commutes daily into Maryland for work should have ONLY Virginia tax withheld from those wages -- not Maryland tax. If a Maryland employer mistakenly withholds Maryland tax anyway, the fix is for the employee to file a Maryland return and get that withheld amount REFUNDED, not to try to credit it against Virginia tax.

Why the Virginia credit didn't apply. Separately, Virginia law lets residents claim a credit on their Virginia return for income tax actually PAID to another state -- but only the LESSER of the tax actually paid to that state or the Virginia tax on that same income, and critically, only when tax was actually paid in the first place. Here, the taxpayer's own Maryland return showed no Maryland tax liability at all -- she'd requested (and was entitled to) a full refund under the reciprocal agreement. Because she never actually paid tax to Maryland (once the reciprocal exemption applied), there was nothing for a Virginia credit to offset.

The bigger point: reciprocity and the out-of-state credit are mutually exclusive. An individual is only eligible for the out-of-state credit when the reciprocal agreement does NOT apply to the income in question. Since her wage income squarely fell under the Virginia-Maryland reciprocal exemption, the credit path was never available to her -- her only correct remedy was to seek her Maryland refund directly from Maryland, which she had, in fact, already done. Her Virginia assessment for the improperly claimed credit was upheld.

What this means for you

Virginia residents commuting to work in Maryland, West Virginia, or Pennsylvania

Your wages from that job should have ONLY Virginia tax withheld under the reciprocal agreement -- if your employer mistakenly withholds the other state's tax anyway, file that state's nonresident return to get the withheld amount refunded; don't claim a Virginia out-of-state credit for it.

Anyone claiming Virginia's out-of-state tax credit

The credit only applies to tax you actually PAID to another state -- if a reciprocal agreement exempted that income from the other state's tax in the first place (meaning you're entitled to a full refund there), there's no credit available on your Virginia return for that income.

Accountants preparing multi-state commuter returns

Check whether a reciprocal agreement applies BEFORE claiming an out-of-state credit -- the two remedies (reciprocal exemption vs. out-of-state credit) apply to different situations and generally can't both be used for the same income.

Common questions

Q: Which states have a reciprocal income tax agreement with Virginia?
A: Maryland, West Virginia, and Pennsylvania, as of this ruling.

Q: My Maryland employer withheld Maryland tax even though I commute from Virginia -- what should I do?
A: File a Maryland nonresident return to get that withheld amount refunded under the reciprocal agreement -- don't claim it as a Virginia out-of-state credit instead.

Q: Can I claim Virginia's out-of-state credit for tax withheld by a reciprocal-agreement state?
A: No, not if the reciprocal agreement exempts that income from the other state's tax -- the credit is only for tax you actually, properly paid to another state, and it doesn't apply where reciprocity already covers the income.

Q: How much of an out-of-state credit can a Virginia resident normally claim (when reciprocity doesn't apply)?
A: The LESSER of the tax actually paid to the other state or the amount of Virginia tax imposed on that same income -- not necessarily the full amount paid to the other state.

Subject

Administration : Reciprocity - Maryland; Credit - Out of State

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-45

Original ruling text

March 23, 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 assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2017.

FACTS

The Taxpayer filed a Virginia resident individual income tax return and claimed a tax credit for income tax paid to Maryland. Under audit, the Taxpayer provided a copy of her Maryland nonresident return indicating that her employer withheld Maryland income tax and that a refund of the tax was requested. Because Virginia has a reciprocal agreement with Maryland, and the Taxpayer was a Virginia resident, the credit was denied and an assessment was issued. The Taxpayer filed an appeal contending she was not liable for the additional tax because she was entitled to claim an out-of-state credit for income tax paid to Maryland.

DETERMINATION

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia and Pennsylvania.

In this instance, the Taxpayer filed a nonresident income tax return and reported income she earned in Maryland to Maryland. Under the Reciprocal Income Tax Agreement between Commonwealth of Virginia and State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only. If Virginia residents have Maryland income tax withheld from wages earned while commuting to work in Maryland, they should file income tax returns with Maryland in order to receive a refund.

The Taxpayer provided a copy of her Maryland return with the appeal. The copy provided indicates she requested a refund from Maryland in accordance with the reciprocal agreement.

Out-of-State Tax Credit

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid to another state provided the income is either earned or business income or gain on the sale of a capital asset. 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 Taxpayer contends she should be allowed a tax credit on her Virginia return, because income tax was paid to Maryland. Because her Maryland return indicates no income tax liability, she did not actually pay tax to another state. Further, under Virginia law, an individual may be eligible for the credit for income tax paid to another state only when the reciprocal agreement does not apply.

CONCLUSION

Because the Taxpayer was not a resident of Maryland in 2017, and her income from the Maryland employer consisted only of wages, the Taxpayer was exempt from income taxation by Maryland under the reciprocal agreement. In addition, she was not eligible to claim a credit for income tax paid to Maryland on her Virginia income tax return.

Accordingly, the assessment for the 2017 taxable year is upheld. An updated bill will be issued shortly. The Taxpayer should remit payment for the outstanding balance within 30 days of the bill date to avoid any collection actions.

The Code of Virginia sections, reciprocal agreement 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/3626.B

Related Documents

97-301