The IRS flagged me as never having filed a Virginia return -- I thought I was a California resident that year, but I still owned a Virginia home and renewed my Virginia driver's license. Do I owe Virginia tax, and can I still get credit for the tax I paid to California?

Plain-English summary

This ruling shows what happens when someone is genuinely taxable as a resident of TWO states at once -- Virginia by domicile, another state (here, California) by actual physical presence -- and how Virginia's credit-for-tax-paid-elsewhere rule handles that overlap.

The IRS tipped off the Department that a taxpayer may have owed a 2017 Virginia return but hadn't filed one. After requesting information, the Department determined she was a Virginia domiciliary resident for the entire year. She had relocated for employment -- first to another state in 2015, then to California in September 2016, where she leased a home, registered a vehicle, and filed a California resident return -- but she never sold her Virginia residence (her partner lived there while he awaited retirement) and she renewed her Virginia driver's license in June 2018. The Department has repeatedly held that renewing a Virginia license is strong evidence of an intent to retain Virginia domicile (P.D. 02-149), even though holding a license alone doesn't automatically defeat a domicile change elsewhere (P.D. 00-151). Changing domicile requires BOTH abandoning the old one and establishing a new one with the intent to remain permanently or indefinitely -- and the taxpayer's retained Virginia home and license undercut any claim that she'd truly abandoned Virginia.

But that wasn't the end of the story. Virginia recognizes a second category of taxable residency -- an "actual resident," someone who spends more than 183 days in Virginia -- and California has its own equivalent rule: under Cal. Rev. & Tax. Code § 17016, spending more than nine months in California creates a presumption of California residency. The taxpayer's documentation showed she'd spent more than nine months in California in 2017, so she was taxable there as an actual resident too, even while remaining a Virginia domiciliary resident.

Ordinarily, Virginia won't allow a credit for tax paid to another state if that state gives ITS OWN residents a reciprocal credit for Virginia tax (Va. Code § 58.1-332 A) -- normally true for California nonresidents. But here, the taxpayer was taxed by California as a RESIDENT, and California doesn't let its own residents claim a credit for tax paid to Virginia. That flips the analysis: the Department confirmed (citing P.D. 97-98 and P.D. 03-21) that when the other state's law blocks the resident from claiming a credit for Virginia tax, Virginia will allow the credit on the Virginia return instead. So despite losing the residency argument, the taxpayer was entitled to a credit for her California tax.

The catch: the credit isn't unlimited. Virginia caps it at the LESSER of the actual tax paid to the other state or the Virginia tax that would apply to that same income (computed via an apportionment fraction: out-of-state income over total Virginia taxable income, citing P.D. 97-301). Reviewing both returns, the Department found the taxpayer's claimed credit exceeded BOTH her actual California tax liability AND her Virginia tax liability -- so it wasn't calculated correctly. Rather than deny the credit, the Department sent the case back to audit staff to recompute the credit properly and issue a corrected bill, preserving the taxpayer's normal 90-day appeal right if she disagreed with the recalculation.

What this means for you

Anyone who relocates but keeps meaningful ties to Virginia (an owned home, a renewed driver's license)

Those retained ties are strong evidence against having abandoned your Virginia domicile, even if you've also established real connections (a lease, a vehicle registration, tax filings) in a new state. Changing domicile requires clearly and concurrently abandoning the old one AND establishing the new one -- retained VA ties can defeat the claim even when your intent to move seemed genuine.

Anyone taxed as a resident by BOTH Virginia (by domicile) and another state (by physical presence)

You may be a genuine dual resident, and that's not automatically a double-tax trap. Check whether the other state allows ITS residents a credit for Virginia tax paid -- if it doesn't (because you're taxed there as a resident, not a nonresident), Virginia will generally let you claim the reverse credit on your Virginia return instead.

Anyone claiming the credit for tax paid to another state

The credit is capped at the LESSER of the tax you actually paid the other state, or the Virginia tax that applies to that same income (computed by an apportionment fraction) -- not the full amount you paid elsewhere and not your entire Virginia liability. Miscalculating this is a common, correctable error rather than a reason to lose the credit outright.

Common questions

Q: I moved to another state for work but kept my Virginia home and driver's license -- am I still a Virginia resident for tax purposes?
A: Likely yes. Retaining a Virginia home and especially renewing a Virginia driver's license are strong evidence you didn't abandon your Virginia domicile, even alongside genuine ties (a lease, a vehicle, tax filings) in the new state.

Q: If I'm found to still be a Virginia domiciliary resident, do I lose credit for taxes I paid to the state I actually lived in?
A: Not necessarily. If that other state taxed you as an actual RESIDENT (not just a nonresident) and its law doesn't let its own residents claim a credit for Virginia tax, Virginia will generally allow you to claim the credit for that state's tax on your Virginia return instead.

Q: How much credit can I claim for tax paid to another state?
A: The credit is capped at the lesser of (a) the tax you actually paid the other state, or (b) the Virginia tax imposed on that same income, calculated using an apportionment fraction (out-of-state income divided by total Virginia taxable income) -- not simply the full amount paid elsewhere.

Q: What happens if my credit calculation turns out to be wrong?
A: The Department can send the case back to recompute the credit correctly rather than denying it outright, and you retain the right to appeal again within 90 days if you disagree with the corrected calculation.

Citations and references

• Va. Code § 58.1-302 (defines domiciliary resident and actual resident; domicile change requires abandonment of the old and establishment of the new)
• Va. Code § 46.2-323.1 (a Virginia driver's license requires Virginia residency)
• P.D. 00-151 (8/18/2000) (domicile can be established elsewhere even while retaining a Virginia driver's license)
• P.D. 02-149 (12/9/2002) (renewing a Virginia driver's license is strong evidence of intent to retain Virginia domicile)
• Va. Code § 58.1-332 A (credit for income tax paid to another state, unavailable if that state gives its residents a reciprocal credit)
• Cal. Rev. & Tax. Code § 17016 (more than nine months' presence presumes California residency)
• P.D. 97-98 (2/24/1998) and P.D. 03-21 (3/20/2003) (credit allowed on the Virginia return when the other state's law bars its resident from claiming a credit for Virginia tax)
• P.D. 97-301 (7/7/1997) (credit is limited to the lesser of tax actually paid to the other state or the Virginia tax imposed on that income, via an apportionment fraction)

Subject

Residency : Domicile - Duel Residency; Credit : Tax Paid to Another State - California

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-53

Original ruling text

April 5, 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, 2017.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia income tax return for the 2017 taxable year. A review of the Department’s records showed that the Taxpayer had not filed a return. The Department requested additional information from the Taxpayer in order to determine if her income was taxable in Virginia. Based upon a review of the information provided, the Department determined the Taxpayer was a domiciliary resident of Virginia for the entire 2017 taxable year. Subsequently, the Taxpayer filed a resident Virginia return, and claimed a credit for income tax paid to California. The Department disallowed the credit and issued an assessment. The Taxpayer filed an appeal, contending that she was a resident of California in 2017 and should not have been required to file a Virginia return.

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 Taxpayer established connections in California that indicate she may have intended to establish domicile there. She relocated first to * (State A) in May 2015 and then to California in September 2016 for employment. The Taxpayer leased a personal residence in California and registered a vehicle there. She also filed a California resident income tax return for the 2017 taxable year. In April 2018, however, the Taxpayer moved from California to *** (State B).

The Taxpayer also retained connections with Virginia. She continued to own a residence in Virginia. The Taxpayer indicates that she did not sell the residence because her partner resided there pending his retirement. The Taxpayer also maintained a Virginia driver’s license which she renewed in June 2018. The Taxpayer indicates that she intended to move to * (State C) to be closer to family, but instead she moved back to Virginia in August 2019.

Virginia Code § 46.2-323.1 states, “No driver’s license ... shall be issued to any person who is not a Virginia resident.” In fact, this section states that every person applying for a driver’s license must execute and furnish to the Commissioner of the Department of Motor Vehicles (DMV) a statement that certifies that the applicant is a Virginia resident. The Department has found that an individual may successfully establish a domicile outside Virginia even if she retains a Virginia driver’s license. See Public Document (P.D.) 00-151 (8/18/2000). However, obtaining or renewing a Virginia driver’s license is considered to be a strong indicator of intent to retain domiciliary residency in Virginia. See P.D. 02-149 (12/9/2002).

The Department acknowledges that a change of domicile occurs as part of a process in which no single factor is dispositive. Even if the Taxpayer had the requisite intent to establish domicile in California, the connections she retained with Virginia tend to indicate that she did not intend to abandon her Virginia domicile. As stated above, a change of domicile requires both the establishment of a new domicile and the abandonment of the old, and these requirements must be met concurrently.

Credit for Tax Paid to Another State

Virginia Code § 58.1 332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. Further, this section states:

The credit . . . shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by . . . this section.

As a general rule, Virginia law does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on his California nonresident return. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return.

Pursuant to Cal. Rev. § 17016, any individual who spends more than nine months in California is presumed to be a California resident. The documentation provided by the Taxpayer indicates she spent more than nine months in California in 2017. Because of the length of time spent in California, the Taxpayer was subject to tax as a resident of California. At the same time, she maintained her Virginia domicile.

The Department has determined that when California law does not permit a taxpayer to claim a credit for taxes paid to Virginia because of her residency status, the Taxpayer would be allowed to claim the credit on the Virginia resident individual income tax return. See P.D. 97 98 (2/24/1998) and P.D. 03-21 (3/20/2003). In the instant case, California law did not permit the Taxpayer to claim a credit on her individual income tax return for taxes paid to Virginia because the Taxpayer was regarded as a California resident. As such, the Taxpayer could claim a credit on her Virginia income tax return for income tax paid to California.

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 P.D. 97-301 (7/7/1997). The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income. As an actual resident of California and a domiciliary resident of Virginia, the Taxpayer would be allowed a credit against her Virginia income tax liability for income tax paid to California to the extent permitted by Virginia Code § 58.1-332.

CONCLUSION

After carefully considering all of the evidence presented, I find that the Taxpayer has failed to prove she abandoned her domicile in Virginia. Therefore, she remained taxable as a domiciliary resident of Virginia in 2017. However, because the Taxpayer was an actual resident of California as well as a domiciliary resident of Virginia, she would be allowed a credit against her Virginia income tax liability for income tax paid to California to the extent permitted by Virginia Code § 58.1-332.

A review of both the Taxpayer’s 2017 Virginia and California returns shows that the amount of the out-of-state credit claimed on the Virginia return exceeded the amount of the Taxpayer’s California income tax liability. In addition, the credit amount exceeded her Virginia income tax liability. As stated above, the credit is limited under Virginia Code § 58.1-332 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 income derived in the other state. As such, the out-of-state credit was not calculated correctly.

Based on the foregoing, the case will be returned to the audit staff to review the Taxpayer’s 2017 California and Virginia income tax returns and correct the credit for income tax paid to another state. After the audit staff makes the correction, they must adjust the assessment accordingly and issue an updated bill. An explanation of the correction must also accompany the revised bill. If the Taxpayer disagrees with the correction made by the audit staff, she retains the right to appeal within 90 days of being notified of the change. Otherwise, the Taxpayer should remit payment for the outstanding balance on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest and possible collections actions.

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/3972.B

Related Documents

00-151

02-149

97-98

03-21

97-301