I'm a Virginia resident who commutes to a job in Maryland and had Maryland tax withheld from my paycheck -- can I claim a Virginia credit for that Maryland tax, or do I need to get it back from Maryland directly? And can Virginia at least waive the interest on my assessment?

Plain-English summary

This ruling is a clean taxpayer loss on two separate points, and a good illustration of a mistake that catches a lot of Virginia residents who work in Maryland: reciprocity agreements and out-of-state tax credits are NOT interchangeable, and using the wrong mechanism means your money sits with the wrong state.

Virginia has reciprocal income tax agreements with Maryland, West Virginia, and Pennsylvania. Under the Virginia-Maryland agreement specifically, a Virginia resident who commutes daily into Maryland for work is supposed to have only Virginia tax withheld from those wages -- Maryland exempts that income from its own tax entirely. A couple filed a joint Virginia return and claimed a credit for Maryland income tax paid on the husband's Maryland wages; the Department audited and denied the credit, because the reciprocal agreement (not the out-of-state credit) governs this exact situation.

The Department explained the distinction: Virginia's out-of-state tax credit under Va. Code § 58.1-332 A is available for tax genuinely paid to another state on income also taxed by Virginia -- but it doesn't apply here, because under the reciprocal agreement, the husband's Maryland wages were never supposed to be subject to Maryland tax in the first place. If Maryland tax was withheld anyway (as commonly happens when an employer doesn't process the reciprocity paperwork correctly), the proper fix is to file a Maryland NONRESIDENT return and get that withholding refunded directly from Maryland -- not to claim a Virginia credit for it. After filing their appeal, the couple did in fact request a refund from Maryland under the reciprocal agreement.

The couple separately asked Virginia to waive the interest on their resulting assessments, citing what they felt was genuine ambiguity in a situation like theirs. The Department rejected that too: interest on underpaid tax is mandatory under Virginia law and isn't a discretionary penalty that can be waived for a sympathetic reason -- it represents a fee for the use of money that was properly owed to the Commonwealth all along, and it can only be reduced if the underlying TAX itself changes. Since the tax was correctly assessed, the interest stood as well.

What this means for you

Virginia residents who commute to jobs in Maryland, West Virginia, or Pennsylvania

If your employer withholds that other state's tax from your paycheck despite the reciprocal agreement, don't claim a Virginia credit for it. File a nonresident return with the OTHER state to get that withholding refunded directly -- claiming it as a Virginia credit will likely be denied, and you'll owe Virginia tax on top of having your money tied up with the wrong state.

Anyone requesting an interest waiver based on genuine confusion about a tax rule

Confusion or ambiguity about which mechanism applies (reciprocity vs. credit, in this case) generally isn't grounds for an interest waiver. Interest is mandatory and tied strictly to whether the underlying tax was correct -- it isn't treated as a discretionary penalty that can be excused for a sympathetic reason.

Accountants and tax professionals with Maryland/West Virginia/Pennsylvania commuter clients

Confirm at the outset which mechanism applies: reciprocity governs wages/salary income covered by the agreement (fix wrongly-withheld tax with the OTHER state, not a Virginia credit), while the ordinary out-of-state credit applies to income the reciprocal agreement doesn't reach.

Common questions

Q: I'm a Virginia resident commuting to a job in Maryland, and Maryland tax was withheld from my paycheck -- can I claim a Virginia credit for it?
A: Generally no. Under the Virginia-Maryland reciprocal agreement, that income isn't supposed to be taxed by Maryland at all. The fix is to file a Maryland nonresident return and get the withholding refunded from Maryland directly.

Q: What states does Virginia have this kind of reciprocal agreement with?
A: As of this ruling, Maryland, West Virginia, and Pennsylvania.

Q: Can Virginia waive interest on my assessment if I was genuinely confused about which mechanism (credit vs. reciprocity) applied to my situation?
A: Generally not. Interest on unpaid tax is mandatory and represents a fee for the use of money properly owed, not a discretionary penalty -- it can only be reduced if the underlying tax assessment itself is adjusted.

Citations and references

• Va. Code § 58.1-342 B (Department authority to enter reciprocal income tax agreements; Virginia has agreements with Maryland, West Virginia, and Pennsylvania)
• Va. Code § 58.1-332 A (out-of-state credit for tax paid to another state, limited to the lesser of tax actually paid or Virginia tax on that income)
• Va. Code § 58.1-1812 (interest on tax underpayments is mandatory and cannot be waived unless the underlying tax is adjusted)
• Reciprocal Income Tax Agreement between the Commonwealth of Virginia and the State of Maryland (12/7/2006)
• P.D. 97-301 (7/7/1997) (out-of-state credit computation methodology); P.D. 21-45 (related prior ruling)

Subject

Credit : OSC - Maryland; Administration : Assessment - Interest Waiver

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-26

Original ruling text

February 08, 2022

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2019 and 2020.

FACTS

The Taxpayers, a husband and wife, filed joint Virginia individual income tax returns for the 2019 and 2020 taxable years and claimed a credit each year for income tax paid to Maryland. Under audit, the Department denied the credits because of Virginia’s reciprocal agreement with Maryland and issued assessments. The Taxpayers filed an appeal, contending they are not liable for the additional tax because they were entitled to claim an out-of-state credit for income tax paid to Maryland. In the alternative, the Taxpayers request that the Department waive any interest on the assessments.

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 Taxpayers filed a nonresident income tax return and reported income the husband earned in Maryland to Maryland. Under the Reciprocal Income Tax Agreement between the Commonwealth of Virginia and the 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.

After filing their appeal, the Taxpayers informed the Department that they 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 Taxpayers contend they should be allowed a tax credit on their Virginia return because income tax was paid to Maryland. Under Virginia law, an individual may be eligible for the credit for tax paid to another state only when the reciprocal agreement does not apply.

Interest Waiver

The Taxpayers request that interest be abated because of the ambiguity they believe exists in situations like theirs. The application of interest to tax underpayments is mandatory under Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due to the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

CONCLUSION

Because the Taxpayers were not residents of Maryland in 2019 or 2020, and the husband’s income from the Maryland employer consisted only of wages, the Taxpayers were exempt from income taxation by Maryland under the reciprocal agreement. In addition, they were not eligible to claim a credit for income tax paid to Maryland on their Virginia income tax return.

Accordingly, the assessments for the 2019 and 2020 taxable years are upheld. Updated bills with accrued interest to date will be issued shortly. The Taxpayers should remit payment for the outstanding balance within 30 days of the bill date to avoid any collections actions.

The Code of Virginia sections and public document 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/3867-C

Related Documents

21-45