If my spouse moved to Virginia to be with me but never really settled here before we both relocated together, can Virginia still tax a retirement distribution he received?

Plain-English summary

A husband and wife filed a part-year Virginia resident return for 2019. During an audit, the Department determined that a retirement income distribution the husband received had come in during what it initially assumed was his period of Virginia residency, and assessed tax on it. The couple appealed, arguing the husband was actually still domiciled in his prior state (State A) when he received the distribution, not Virginia.

The husband had moved to Virginia in August 2018 to live with his future wife and "see if they would like to live here together," and he continued working remotely for a branch of his employer based in yet a different state (State B), using a State B-registered work vehicle. Throughout his time in Virginia, he kept his State A residence, driver's license, and voter registration, and left his other vehicles registered and garaged in State A. He never got a Virginia driver's license, never registered a vehicle in Virginia, and never registered to vote in Virginia. Within about a year, he was offered a new job back in State A, and the couple decided to move there together, signing a State A apartment lease in April 2019 and the husband starting his new job there in June 2019.

The Department found this pattern was essentially the opposite of establishing a new domicile: the husband never showed an intent to abandon his State A domicile, he kept every meaningful State A connection, and never showed an intent to remain in Virginia permanently or indefinitely, since he made almost no Virginia connections and left within roughly a year. He also didn't meet the alternative 183-day actual-residency threshold in either 2018 or 2019. As a result, the Department concluded he was never a Virginia resident, domiciliary or actual, for 2019 at all. Because federal law (4 U.S.C. § 114) gives only a person's actual state of residence the authority to tax a retirement distribution, and Virginia was never his state of residence, Virginia had no right to tax that distribution regardless of where he happened to be physically living when he received it.

The wife's situation was different and unaffected by this analysis: she was properly treated as a Virginia part-year resident up until the couple's move date. Because the couple had originally filed jointly as part-year residents, based on the mistaken assumption the husband was also a Virginia resident, the Department explained that Virginia law lets spouses with different residency statuses elect to file as if both were residents, but given the tax consequences here, that election likely wouldn't benefit them. Absent that election, each spouse's tax is computed separately based on their own actual residency: the husband as a full-year nonresident, owing no Virginia tax on the retirement distribution, and the wife as a part-year resident. The couple was invited to file amended separate returns reflecting this, and was also reminded to check whether the retirement income had been properly reported to State A.

What this means for you

Couples where one partner moves to be with the other before deciding whether to settle permanently

Moving in with a partner "to see how it goes," without establishing the other typical markers of a new domicile (driver's license, vehicle registration, voter registration), generally isn't enough to make that new location your tax domicile, especially if you keep your prior state's connections active the whole time and end up leaving again within a relatively short period.

Recipients of retirement or pension income who split time between states during a transition

Federal law protects retirement income from being taxed by any state except your actual state of residence at the time you receive it. If you were genuinely a nonresident of Virginia when a distribution arrived, Virginia can't tax it even if you were physically present in Virginia that day.

Married couples where the spouses have different residency statuses for the same year

You don't have to file as if both spouses share the same residency status. Virginia allows, but doesn't require, an election to file jointly as residents even when one spouse is a nonresident; absent that election, each spouse's Virginia tax is computed separately based on their own actual residency situation.

Common questions

Q: Which state has the right to tax a retirement or pension distribution?
A: Only the recipient's actual state of residence at the time the distribution is received, under federal law (4 U.S.C. § 114) -- a state where the recipient merely happens to be staying, without being a resident there, cannot tax it.

Q: Does moving in with a partner in Virginia automatically make that partner a Virginia resident?
A: No -- residency and domicile depend on the specific facts and intent, including whether the person establishes typical connections like a driver's license, vehicle registration, and voter registration, and whether they actually intend to stay permanently or indefinitely.

Q: If spouses have different Virginia residency statuses in the same year, must they file one joint return treating both as residents?
A: No -- Virginia allows an optional election to do so under Va. Code § 58.1-326, but if the couple doesn't make that election, each spouse's tax is computed separately based on their own actual residency status.

Citations and references

• Va. Code § 58.1-302 (definitions of domiciliary resident and actual resident)
• Va. Code § 58.1-325 (nonresidents taxed on Virginia-source income)
• Va. Code § 58.1-321 (filing exception threshold)
• 4 U.S.C. § 114 (Pub. L. 104-95) (only the recipient's state of residence may tax retirement income)
• Va. Code § 58.1-326 (election for spouses with different residency status to file as if both were residents)

Subject

Residency: Domicile - Did not abandon former domicile Residency: Nonresident - Retirement income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-151

Original ruling text

November 16, 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 “Taxpayers”) for the taxable year ended December 31, 2019.

FACTS

The Taxpayers, a husband and wife, filed a part year Virginia resident return for the 2019 taxable year. Under audit, the Department requested additional information from the Taxpayers in order to determine if the correct type of return was filed and whether the correct amount of Virginia taxable income was reported. After reviewing the information provided by the Taxpayers, the auditor determined that a retirement income distribution was received by the husband during his period of Virginia residency and issued an assessment accordingly. The Taxpayers appeal, contending the husband was a resident of * (State A) when the distribution was received.

DETERMINATION

Residency

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. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. 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. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change.

In determining domicile, consideration may be given to the individual’s expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, situs of real or tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person’s domicile. A person’s true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

The Department determines a taxpayer’s intent through the information provided. A taxpayer has the burden of proving that he or she has abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Department must conclude that he or she intended to remain indefinitely in Virginia.

The husband was a domiciliary resident of State A before relocating to Virginia in August 2018 to be with his future wife, who was a Virginia resident. The Taxpayers stated that he moved to Virginia in order to see if they would like to live here together. The husband retained his residence in State A, his State A driver’s license and voter’s registration. He also kept his State A registered vehicles garaged in State A. The husband was subsequently offered a job with a new employer in State A, and the Taxpayers decided to move to State A together. In April 2019, the Taxpayers began leasing an apartment in State A and the husband began traveling between Virginia and State A moving their belongings. He began his new job in State A in June 2019.

The husband established few connections with Virginia. He lived in Virginia at his future wife’s home where he worked remotely for a * (“State B”) branch of his previous employer. During the week he used a State B registered vehicle provided by his employer. He did not obtain a Virginia driver’s license, register any vehicles in Virginia, or register to vote in Virginia.

As stated above, a change of domicile requires that a taxpayer prove two elements concurrently: 1) that he abandoned the old domicile and had no intent to return to it; and 2) that he established a new domicile, which must have been formed by physical presence coupled with the intent to remain permanently or indefinitely. In this case, the husband retained his State A residence, driver’s license, vehicle registrations, and voter registration, and he returned to State A within a year of moving to Virginia. In addition, he made few, if any, connections with Virginia that would normally occur when an individual makes a permanent move. After carefully considering all of the evidence presented, I find that the husband did not abandon State A as his domicile and did not evidence an intent to remain in Virginia permanently or indefinitely. In addition, the husband resided in Virginia for less than 183 days in each of 2018 and 2019. Accordingly, I find that the husband was neither a domiciliary nor actual resident of Virginia for the 2019 taxable year.

Nonresidents

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents, unless the individual meets the filing exception described in Virginia Code § 58.1-321. See Virginia Code § 58.1-325. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deductions from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss, and deductions attributable to (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery Department, and gambling winnings from wagers placed or paid at a location in Virginia. Thus, a nonresident with Virginia source income is required to file a nonresident Virginia income tax return unless the filing exemption applies. See Virginia Code § 58.1-341 A 2.

With regard to retirement income distributions, federal law provides that only an individual’s state of residency may tax the distribution. See Public Law (P.L.) 104-95, as codified at Title 4 U.S.C. § 114.

CONCLUSION

Based on the husband’s period of residency listed on the Taxpayers’ part-year Virginia resident return and the timing of the retirement distribution, it appeared that the distribution was received during the husband’s period of Virginia residence. After a careful review of the facts, however, the Department has determined that the husband was not a Virginia resident at the time the distribution was received. The wife, however, was properly considered a resident of Virginia until her move out date.

Nevertheless, in cases in which one spouse is nonresident and the other is a resident, Virginia Code § 58.1-326 permits married individuals to elect to determine their joint Virginia taxable income as if they were both residents. Considering the tax consequences in this case, it is unlikely that the Taxpayers would wish to make this election for the 2019 taxable year. When such an election is not made, Virginia Code § 58.1-326 provides that the spouse’s separate taxes shall be determined on their separate Virginia taxable incomes. The Taxpayers, therefore, will be permitted to make amended separate filings for the 2019 taxable year, the husband as a nonresident and the wife as a part-year resident. As a nonresident, the husband’s retirement distribution would not be taxable by Virginia.

The returns should be submitted within 60 days from the date of this letter to: Virginia Department of Taxation, Attn: *, Appeals & Rulings Unit, P.O. Box 27203, Richmond, Virginia 23261-7203. Upon receipt, the returns will be reviewed and the assessment will be adjusted, as appropriate. If the returns are not received within the allotted time, the assessment will be considered correct and collections actions may result.

Further, the documents submitted with the Taxpayers’ appeal indicate they may not have reported the retirement income to State A. The Taxpayers are, therefore, advised to review the tax laws of State A and file an amended State A return, if necessary, to report such income.

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/4109.X