I paid long-term care insurance premiums and listed them on my federal Schedule A, but my total medical expenses were under the deduction floor so I never actually got a federal tax benefit for them -- can I still claim Virginia's deduction? And can I subtract retirement income from an IRA I funded with military pay while filing returns in Pennsylvania?

Plain-English summary

This ruling covers two unrelated Virginia tax breaks in one case, with a split result: the couple won on their long-term care premium deduction but lost on their retirement income subtraction.

A married couple claimed a Virginia deduction for long-term care insurance premiums and a subtraction for retirement income on their 2016 return. The Department disallowed both and issued an assessment, which the couple paid before appealing (a "protective claim," which preserves refund rights while a dispute is resolved).

On the long-term care deduction: Virginia allows it, but bars it specifically when the taxpayer actually CLAIMED a federal income tax deduction for those same premiums. The couple's federal Schedule A listed medical expenses that included their long-term care premiums, but their total medical expenses never exceeded the 10%-of-income floor that applied for the 2016 tax year -- meaning they never actually got any federal tax benefit from those premiums at all. Because there was no actual federal deduction claimed, the bar didn't apply, and the couple could claim Virginia's deduction (recalculated slightly, since they flagged their own math error in the original premium amount).

On the retirement income subtraction: Virginia lets a taxpayer subtract retirement income to the extent the underlying contributions were both federally deductible AND previously subject to tax in another state. The husband had made IRA contributions using military pay while he was filing Pennsylvania tax returns -- but Pennsylvania's own tax law excludes military pay from its state income tax entirely, and nothing in the record showed those specific contributions were ever added back into his Pennsylvania taxable income. Since the contributions were never actually taxed by Pennsylvania in the first place, they failed the second half of Virginia's two-part test, and the subtraction was properly denied.

What this means for you

Anyone claiming Virginia's long-term care insurance premium deduction

The bar on claiming Virginia's deduction applies only if you actually got a federal tax BENEFIT (i.e., you claimed the deduction) for the same premiums -- not merely because you listed the expense on a federal form. If your total medical expenses didn't clear the applicable federal floor, you may not have actually deducted the premiums federally at all, which can preserve your Virginia deduction.

Anyone who worked or served in a state that doesn't tax certain income (like military pay) before moving to Virginia

Virginia's retirement income subtraction requires that your retirement contributions were actually SUBJECT TO TAX in the other state when made, not just that you filed a return there. If the specific income funding your contributions (like excluded military pay) was never actually taxed by that state, contributions from it won't qualify for this subtraction.

Accountants and tax professionals

This ruling is a clean two-part illustration: check whether a client actually realized a federal tax benefit before assuming a Virginia deduction bar applies, and trace retirement contributions back to their actual funding source and that state's specific exclusions before assuming the retirement subtraction's "previously taxed" requirement is met.

Common questions

Q: I listed long-term care premiums on my federal Schedule A, but my total medical expenses were too low to actually get a federal deduction -- can I still claim Virginia's deduction?
A: Yes. Virginia's bar applies only when you actually claimed a federal deduction for those premiums, not merely because they appeared as an itemized expense that didn't end up being deductible.

Q: Can I subtract retirement income in Virginia if my contributions came from income that another state doesn't tax (like military pay)?
A: Generally no. Virginia's subtraction requires that the contributions were actually subject to tax by the other state when made. If that state excludes the underlying income (as Pennsylvania does for military pay), contributions funded by it won't qualify.

Q: What is a "protective claim" and why did this couple pay first before appealing?
A: A protective claim lets a taxpayer pay an assessment in full and then dispute it within a set period, preserving refund rights while avoiding accumulating interest and collection risk during the appeal.

Citations and references

• Va. Code § 58.1-322.03 10 (formerly § 58.1-322 D 10) (long-term health care insurance premium deduction, barred only where a federal deduction was actually claimed for the same premiums)
• Va. Code § 58.1-322.02 11 (retirement income subtraction; contributions must be both federally deductible and previously subject to tax in another state)
• Va. Code § 58.1-1824 (protective claim for refund)
• Va. Code § 58.1-301 (Virginia conforms to IRC terminology/references unless a different meaning is clearly required)
• P.D. 08-165 (8/29/2008) (long-term care premium deduction available when no federal deduction was actually claimed)
• P.D. 10-214 (9/15/2010) (Pennsylvania does not allow retirement plan contributions to be excluded from income, relevant to whether contributions were "previously taxed"); P.D. 08-140 (7/30/2008) (related retirement subtraction analysis)

Subject

Deduction : Long Term Healthcare - No Federal Deduction Taken; Subtractions : Retirement Income - Contributions Not Previously Taxed

Source

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

Original ruling text

February 08, 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 “Taxpayers”) for the taxable year ended December 31, 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, filed a joint Virginia resident income tax return for the 2016 taxable year claiming a deduction for long-term health care premiums and a subtraction for income from a retirement account, the contributions to which were previously taxed by another state. Under review, the Department disallowed the deduction and subtraction and issued an assessment. The Taxpayers paid the assessment and subsequently appealed, contending the information provided supports the deduction and subtraction as claimed.

DETERMINATION

Protective Claim

Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department to file a protective claim for refund within three years of the date of an assessment. A protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided upon its merits pursuant to Virginia Code § 58.1-1821. The Taxpayers satisfied the requirements of filing a protective claim by paying the assessment in full and asserting their rights within the statutory deadline. Because the protective claim does not involve facts or law which depend upon the resolution of a pending case, the Department will consider the claim on the merits pursuant to the administrative appeal procedures.

Conformity

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 federal adjusted gross income (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 .

Long-Term Health Care Premium Deduction

Virginia Code § 58.1-322.03 10 (formerly 58.1-322 D 10) provides a deduction for “[t]he amount an individual pays annually in premiums for long-term health care insurance.” However, “no such deduction . . . shall be allowed if the individual has claimed a federal income tax deduction for such taxable year for long-term health care insurance premiums paid by him.”

In this case, the Taxpayers’ federal Schedule A reported medical expenses that included long-term health care premiums. The Taxpayers, however, did not actually deduct any medical expenses because their total medical expenses did not exceed the 10% of FAGI “floor” that applied for the 2016 taxable year. Because the Taxpayers did not get the benefit of a federal income tax deduction for the premiums paid, they were entitled to claim the deduction on their 2016 Virginia return. See Public Document (P.D.) 08-165 (8/29/2008).

Retirement Income Subtraction

Virginia Code § 58.1-322.02 11 provides a subtraction for any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by IRC § 401, an individual retirement account or annuity established under IRC § 408, a deferred compensation plan as defined by IRC § 457, or any federal government retirement program, 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. Before taxpayers are permitted to subtract any portion of their retirement income, contributions to the retirement plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must still have been subject to income tax in another state.

In P.D. 10-214 (9/15/2010), the Department recognized that Pennsylvania does not allow contributions made by an employee to a retirement plan to be excluded from income. Although the husband may have made contributions to an individual retirement account (IRA) in tax years for which he filed Pennsylvania income tax returns, it appears that his military pay, from which the contributions were made, was entirely excluded from the computation of his Pennsylvania income. Further, there is no indication that the contribution amounts were added back for purposes of computing his Pennsylvania income tax. The only items of income that were reported to Pennsylvania were interest and dividends. As such, the contributions would not have been subject to Pennsylvania income tax and would not qualify for the subtraction. See P.D. 08-140 (7/30/2008).

CONCLUSION

Based on the information provided, the Taxpayers were not eligible to claim a retirement income subtraction. The Taxpayers were, however, eligible to claim a deduction for long-term health care premiums. The Taxpayers’ correspondence indicated that they made an error in their initial premium calculation and that the correct deduction was less than originally claimed. The case will be returned to the audit staff to allow the corrected deduction and to issue a refund as warranted.

The Code of Virginia sections and public documents 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/3480.X

Related Documents

08-140

08-165

10-214