I lived in Virginia full-time, but my retirement income came from an account I contributed to while living in another state -- can I still subtract it from my Virginia return?

Plain-English summary

A taxpayer who had owned a home and lived in Virginia continuously from 2009 through 2018 (returning to her prior home state, "State A," only in 2019 for health reasons) claimed a subtraction on her 2018 Virginia return for retirement income she said was attributable to contributions previously taxed by State A. Under audit, the Department disallowed the subtraction and assessed additional tax, which she paid under protest before appealing on the theory that Virginia had no right to tax retirement income that was really "State A source income."

The Department first confirmed she was, in fact, a Virginia resident for 2018 -- she filled out a domicile questionnaire confirming she lived in Virginia full-time that year with only occasional State A visits, and had consistently filed Virginia resident returns since 2003. That mattered because of a specific federal law, 4 U.S.C. § 114, which prohibits a state from taxing retirement income received by someone who is NOT a resident or domiciliary of that state -- essentially protecting people who've moved away from having their old employer's home state chase them for tax on a pension years later. But that protection only helps nonresidents. It doesn't shield a genuine Virginia resident from Virginia tax on retirement income, even if that income was originally earned or the contributions were made while the person lived somewhere else; a state can generally tax all the income of its own residents, wherever that income was earned, a principle the U.S. Supreme Court recognized decades ago in New York ex rel. Cohn v. Graves.

That left the taxpayer's only real option: Virginia's own retirement-income subtraction, which does exist for exactly this kind of situation, but with a specific requirement. Va. Code § 58.1-322.02(11) lets a taxpayer subtract distributions from an IRA (or similar retirement account) to the extent the CONTRIBUTIONS to that account were already subject to income tax in another state -- avoiding true double taxation on money that was taxed once going in and would otherwise be taxed again coming out. The taxpayer claimed this subtraction, but never actually argued (or offered any evidence) that her contributions met this test. Without that proof, the Department had no basis to allow the subtraction, and the assessment was upheld.

What this means for you

Retirees who moved to Virginia and now receive retirement income tied to a prior state

Living in Virginia as an actual resident means Virginia can tax your full retirement income, even if it's connected to work or contributions made elsewhere -- 4 U.S.C. § 114 only protects nonresidents from a state you've left, it doesn't exempt income from the state where you actually live now.

Taxpayers wanting to use Virginia's retirement-income subtraction

This subtraction isn't a general "moved from another state" exemption. It specifically requires proof that the CONTRIBUTIONS to the retirement account were already taxed by another state's income tax -- gather documentation (like prior-state tax returns from the contribution years) showing that if you plan to claim it.

Anyone confused about why a distribution seems to be taxed twice

If your contributions were taxed once by another state going in, and you can prove it, Va. Code § 58.1-322.02(11) is meant to prevent Virginia from taxing that same money again coming out as a distribution -- but the burden is on you to substantiate that the contributions were actually taxed elsewhere.

Common questions

Q: Does moving my retirement account's "source" state protect me from Virginia tax once I live in Virginia?
A: No. Federal law (4 U.S.C. § 114) only protects nonresidents from having a state tax their retirement income -- it doesn't stop your actual state of residence, Virginia, from taxing your full retirement income once you live there.

Q: What do I need to prove to use Virginia's retirement-income subtraction?
A: You need to show that the contributions to the retirement account (not just the distribution itself) were subject to income tax in another state under Va. Code § 58.1-322.02(11). A bare assertion that the income is "from" another state isn't enough without that documentation.

Q: I only visited my old state occasionally during the year -- does that make me a nonresident there instead of a Virginia resident?
A: Not based on the facts here -- the taxpayer confirmed she lived in Virginia full-time with only occasional visits elsewhere, which the Department treated as consistent with being an actual Virginia resident for that year.

Citations and references

• Va. Code § 58.1-302 (domiciliary resident and actual resident defined)
• 4 U.S.C. § 114 (states may not tax retirement income received by a nonresident/non-domiciliary)
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937) (a state may tax all income of its residents)
• Va. Code § 58.1-301 (Virginia conformity to the IRC)
• Va. Code § 58.1-322.02(11) (subtraction for IRA/retirement distributions where contributions were already taxed by another state)
• P.D. 02-118 (9/3/2002) and P.D. 16-128 (6/22/2016) (an actual Virginia resident's retirement income is taxable even if derived from another state's employment or the taxpayer remains domiciled elsewhere)

Subject

Subtractions: Retirement Income - Sourcing to another state

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-136

Original ruling text

September 20, 2022

Re: § 58.1-1821 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 “Taxpayer”) for the taxable year ended December 31, 2018.

FACTS

The Taxpayer filed a Virginia resident individual income tax return and claimed a subtraction for retirement income attributable to retirement plan contributions previously taxed by another state. Under audit, the Department disallowed the subtraction and issued an assessment for additional tax and interest. The Taxpayer paid the assessment under protest and filed an appeal, contending that Virginia may not tax her retirement income because it is * (State A) source income.

DETERMINATION

Taxation of Virginia Residents

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

The Taxpayer submitted a domicile questionnaire stating that she has owned a home and lived in Virginia beginning in 2009 and continuing through 2018. She stated that she returned to State A in 2019 for health reasons. The Department’s records indicate that the Taxpayer consistently filed Virginia resident income tax returns for the 2003 through 2018 taxable years. The Taxpayer confirmed that she lived full time in Virginia during the 2018 taxable year and took only occasional visits to State A. The Taxpayer was therefore taxable as a Virginia resident for the 2018 taxable year.

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, (1937), the United States Supreme Court explained “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.”

The Taxpayer believes her retirement income was not subject to tax in Virginia because she resided in State A when the income was earned. Public Law (P.L.) 104-95, as codified at 4 U.S.C. § 114, prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. Consistent with her status as a Virginia resident, the Taxpayer filed a Virginia resident income tax return for the 2018 taxable year and a nonresident State A return to report income from rental properties located in State A.

To the extent included in federal adjusted gross income (FAGI), retirement income received by an actual or domiciliary resident of Virginia would be included in the computation of Virginia taxable income. In Public Document (P.D.) 02-118 (9/3/2002), the Department determined that under P.L. 104-95, retirement income received by an actual resident of Virginia was subject to Virginia’s income tax even if the retirement income was derived from employment in the other state and the taxpayer remained a domiciliary resident of the other state. See also P.D. 16-128 (6/22/2016).

Retirement Income Subtraction

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 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 Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-322.02 11 provides a subtraction for certain distributions received from “an individual retirement account or annuity established under IRC § 408 . . . the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state.”

Although the Taxpayer claimed this subtraction on her Virginia return, she does not contend that the retirement income met the eligibility requirements for the subtraction. In addition, no evidence has been provided to indicate that the retirement income satisfied the statutory requirements in order to claim the subtraction.

CONCLUSION

Because the Taxpayer was a resident of Virginia for the 2018 taxable year, she was subject to tax on her Virginia taxable income. Based on the information provided, the Taxpayer’s retirement income distribution was properly included in her Virginia taxable income and was not eligible for any subtraction. Therefore, the Taxpayer’s request for relief cannot be granted and the assessment is upheld. The Taxpayer has paid the assessment in full, and, accordingly, no further action is required.

The Code of Virginia sections and public documents 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 4167.X

Related Documents

02-118

16-128