I excluded my 2020 unemployment benefits from my federal return under the American Rescue Plan Act -- can I also subtract them again on my Virginia return?

Plain-English summary

This ruling untangles a timing mismatch between Virginia's tax code and a mid-filing-season federal law change, and the double-dip that resulted from it.

The taxpayer received unemployment compensation in 2020. Normally, unemployment benefits are included in federal adjusted gross income (FAGI) under IRC § 85, and Virginia lets a taxpayer subtract that same amount from Virginia taxable income (Va. Code § 58.1-322.02(17)) -- a mechanism that avoids Virginia double-taxing income Congress has decided to tax federally in a particular way, not a general unemployment-income exemption.

The American Rescue Plan Act (ARPA), enacted March 11, 2021, retroactively let taxpayers with income under $150,000 exclude the first $10,200 of 2020 unemployment benefits from federal gross income entirely. The taxpayer excluded that amount from her federal return under ARPA, as she was entitled to. But she also claimed the Virginia subtraction for that same amount on her 2020 Virginia return -- even though it had never been included in her FAGI in the first place, because ARPA had already excluded it federally.

Virginia's conformity to the Internal Revenue Code runs through a specific date each year, set by the General Assembly. For 2020 returns, Virginia's conformity date only ran through December 31, 2020 -- and ARPA wasn't enacted until March 11, 2021, after most 2020 returns were already due. So the ARPA exclusion technically wasn't part of Virginia law at the time 2020 returns were filed. The Department's practical answer (consistent with prior guidance in P.D. 22-93) is not to force taxpayers to add the ARPA exclusion back into Virginia income -- but it also means a taxpayer can't claim the separate Virginia subtraction for unemployment benefits that were never taxed at the federal level to begin with. Allowing both the federal exclusion and the Virginia subtraction for the same income would let the taxpayer subtract income that was never part of her taxable income at all -- a double benefit. The Department added back only the ARPA-excluded portion (verifying against the taxpayer's actual W-2 records, since she had received two W-2s in different amounts) and upheld the assessment, with interest continuing to accrue until paid.

What this means for you

If you claimed a Virginia unemployment subtraction on a 2020 return and also excluded ARPA unemployment income federally

You can only subtract unemployment compensation that was actually included in your FAGI. If ARPA already excluded some or all of your 2020 unemployment benefits from your federal return, you can't also subtract that same amount on your Virginia return -- doing so is a double benefit the Department will catch and reverse, with interest.

If you're an accountant reconciling a client's 2020 unemployment income across federal and Virginia returns

Check whether the client's unemployment income was reduced by the ARPA $10,200 federal exclusion before applying the Virginia subtraction under Va. Code § 58.1-322.02(17) -- the Virginia subtraction should only be taken on the portion that was actually taxed at the federal level, not the full amount received.

If you're confused about why Virginia didn't require adding the ARPA exclusion back to income at all

Virginia's practice (per P.D. 22-93) was not to require Virginia taxpayers to add back the ARPA-excluded unemployment amount to their Virginia taxable income, even though Virginia's conformity date technically predated ARPA's enactment. That's a separate, taxpayer-favorable accommodation -- it doesn't also entitle you to a further Virginia subtraction for the same already-excluded income.

Common questions

Q: Does Virginia tax unemployment benefits differently than the federal government?
A: No -- Virginia starts from federal adjusted gross income and generally follows the federal treatment. The Va. Code § 58.1-322.02(17) subtraction exists to offset unemployment benefits that were included in FAGI under IRC § 85; it isn't a separate, independent unemployment exemption.

Q: Why didn't Virginia require the ARPA-excluded amount to be added back given the conformity-date mismatch?
A: The Department addressed that timing gap in a separate ruling, P.D. 22-93 (5/5/2022), and chose not to require an add-back for that reason alone. This ruling deals with a different issue: claiming the ordinary Virginia subtraction on top of an amount already excluded federally.

Q: What if I received corrected or duplicate W-2s from the unemployment agency for the same benefits?
A: The Department will look at your actual W-2 records to determine what was truly received and excluded; in this case, the Department verified the amounts using both W-2s and only added back the portion the taxpayer had actually excluded from FAGI, not a duplicated total.

Citations and references

• Va. Code § 58.1-301 (Virginia terminology conforms to the IRC unless otherwise specified)
• Va. Code § 58.1-322.02(17) (subtraction for unemployment benefits taxable under IRC § 85)
• IRC § 85(a), (c)(1) (unemployment compensation included in gross income; ARPA exclusion)
• American Rescue Plan Act, Title IX, § 9042(a), P.L. 117-2 (March 11, 2021) (excluding first $10,200 of 2020 unemployment benefits for taxpayers with income under $150,000)
• Virginia Tax Bulletin (VTB) 21-4 (3/15/2021) (Virginia's IRC conformity date advanced to December 31, 2020)
• P.D. 22-93 (5/5/2022) (ARPA unemployment exclusion not in effect when Virginia's 2020 conformity date was fixed)

Subject

Subtractions: Unemployment Benefits - American Rescue Plan Act (ARPA)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-152

Original ruling text

November 16, 2022

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, 2020.

FACTS

The Taxpayer received unemployment compensation during the 2020 taxable year. The Taxpayer claimed a subtraction for it on her 2020 Virginia individual income tax return. Because the income was not included in federal adjusted gross income (FAGI) reportable for federal income tax purposes pursuant to the American Rescue Plan Act (ARPA), the Department added back the amount of unemployment compensation excluded from FAGI and issued an assessment. The Taxpayer appealed, contending that she properly reported her unemployment compensation.

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 in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of VTI with 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 .

Unemployment benefits are generally included in a taxpayer’s FAGI. See IRC § 85(a). Virginia Code § 58.1-322.02 17 allows a taxpayer to subtract the amount received for unemployment benefits that are taxable pursuant to IRC § 85. The ARPA, however, excluded the first $10,200 of unemployment benefits from gross income for each taxpayer with income less than $150,000 for any taxable year beginning in 2020. See Title IX, § 9042(a) of the ARPA, P.L. 117-2 (March 11, 2021). See also IRC § 85(c)(1).

In 2003, Virginia began conforming to the IRC as of a specific or fixed date. Since then, the General Assembly has enacted legislation to move the date of conformity forward each year. Effective for taxable years beginning on and after January 1, 2020, Virginia’s conformity date was advanced from December 31, 2019 to December 31, 2020, with a number exceptions. See Virginia Tax Bulletin (VTB) 21-4 (3/15/2021).

The ARPA, including its provision that allowed taxpayers with adjusted gross incomes of less than $150,000 to exclude up to $10,200 in unemployment compensation from their gross income in 2020, was not enacted until March 11, 2021. Because Virginia only conformed to the IRC through December 31, 2020 during the 2021 General Assembly session, the provisions of the ARPA were not in effect at the time that 2020 individual income tax returns were due. See Public Document (P.D.) 22-93 (5/5/2022).

In this case, the Taxpayer excluded her unemployment benefits from her taxable income on her 2020 federal return in accordance with the ARPA and also claimed a Virginia subtraction for the same income that had already been excluded from FAGI, but failed to add it back on the 2020 Virginia return. Allowing both an exclusion from FAGI and permitting a subtraction on the Virginia return for unemployment compensation would essentially allow the Taxpayer a double benefit by allowing subtraction for compensation that was not even included in total income. As such, the Department was correct in adding the unemployment benefits back to FAGI for purposes of computing the Taxpayer’s VTI. The assessment, therefore, is upheld.

The Taxpayer should be aware that the only addition the Department made was for that amount of unemployment compensation that she had already excluded from FAGI. The Taxpayer apparently received two W-2s in differing amounts from the unemployment administrator. The second W-2 appears to have been a correction of the first. The Department did not include the amount reported on the first W-2 in the Taxpayer’s income when making the adjustment.

The Taxpayer will receive an updated bill, which will include accrued interest to date. The Taxpayer should remit payment within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections, public document and tax bulletins 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/4108.B

Related Documents

21-4

22-93

22-1