Can I subtract my National Guard pay and basic military pay from Virginia taxable income if my W-2 was issued under a reserve-unit employer ID number?

Plain-English summary

A husband and wife claimed two military-related subtractions on their 2018 Virginia return: one for the husband's National Guard pay, and one for his basic military pay. The Department initially disallowed both and assessed additional tax; the couple appealed.

For the National Guard subtraction, the auditor's concern was the husband's Form W-2, which had been issued by the Defense Finance Accounting Service (DFAS) using a federal employer identification number normally associated with reserve units rather than the National Guard specifically -- income from reserve units or another state's National Guard doesn't qualify for this Virginia-specific subtraction. Citing a similar prior case, P.D. 16-129, the Department explained that a W-2 coded this way doesn't automatically disqualify the income; it just means the taxpayer has to independently document that the pay was actually earned through Virginia National Guard service specifically, not simply reserve duty or a different state's Guard. Here, the couple submitted documentation showing the husband did serve in the Virginia National Guard, which was enough: the Department allowed the National Guard pay subtraction.

The basic military pay subtraction was a different story. That subtraction requires the service member to have been on extended active duty for more than 90 days during the year, and the couple provided no evidence establishing that. Without that proof, the disallowance of the basic military pay subtraction was upheld. A revised bill reflecting the corrected result, one subtraction allowed, one denied, was to be issued, with 30 days to pay before further interest would accrue.

What this means for you

Virginia National Guard members whose W-2 is coded through DFAS as a reserve unit

Don't assume your National Guard pay subtraction is doomed just because your W-2's employer ID number looks like a generic reserve-unit code. Gather independent documentation -- orders, personnel records, unit designation -- proving the pay was earned specifically through Virginia National Guard service, and submit it if the Department questions the subtraction.

Anyone claiming Virginia's basic military pay subtraction

You must be able to show you were on extended active duty for more than 90 days during the year the subtraction is claimed. A W-2 or a general assertion of military service alone won't carry that burden if it's questioned -- keep your orders or other duty-status documentation.

Common questions

Q: Does a W-2 coded for a "reserve unit" employer ID automatically disqualify National Guard pay from Virginia's subtraction?
A: No -- it just means you may need to provide additional documentation proving the pay was actually earned through Virginia National Guard service, since some reserve-coded W-2s are for other states' Guard members or true reserve duty, which wouldn't qualify.

Q: Who can claim Virginia's National Guard pay subtraction?
A: Anyone with active or inactive Virginia National Guard service, capped at pay for 39 days of service or $3,000, whichever is less, and limited to the rank of captain (O-3) and below.

Q: What has to be proven for the basic military pay subtraction?
A: That the service member was on extended active duty for more than 90 days during the taxable year; the subtraction covers up to $15,000 of basic pay, phasing out completely once basic pay reaches $30,000, and applies whether stationed inside or outside Virginia.

Citations and references

• Va. Code § 58.1-322.02(8) (subtraction for Virginia National Guard pay)
• Va. Code § 58.1-322.02(15) (subtraction for basic military pay)
• Va. Code § 58.1-301 (Virginia income tax terminology conforms to the Internal Revenue Code)
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Cir. Ct. City of Roanoke, Law No. 82-0846 (10/27/1983) (deductions and subtractions strictly construed against the taxpayer)
• P.D. 16-129 (6/22/2016) (reserve-coded W-2 doesn't automatically disqualify a National Guard pay subtraction)

Subject

Subtraction: Military - National Guard income/Basic Pay

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-15

Original ruling text

January 23, 2023

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, 2018.

FACTS

The Taxpayers, a husband and wife, timely filed a 2018 Virginia resident individual income tax return and claimed subtractions for the husband’s basic military pay and National Guard pay. Under review, the Department requested additional information to determine whether the Taxpayers were entitled to the subtractions. Based on the information that was received, the Department disallowed both subtractions and issued an assessment. The Taxpayers appealed, contending that the husband met the qualifications for the military subtractions.

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 Virginia taxable income (VTI) with federal adjusted gross income (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 .

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell’s Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

National Guard Pay

Virginia Code § 58.1-322.02 8 allows a subtraction of wages or salaries received by any person for active and inactive service in the National Guard of the Commonwealth of Virginia. The amount of the subtraction is the lesser of the amount of National Guard income received not to exceed the amount of income from 39 calendar days of service, or $3,000. Further, National Guard personnel may only claim the subtractions if their rank is captain (O3) and below. Income derived from service in the active or reserve units of the military or National Guard units from other states, including the District of Columbia, are ineligible for this subtraction.

The Department disallowed the subtraction for National Guard pay because the husband’s W-2 was issued by the Defense Finance Accounting Service (DFAS) using a federal employer identification number (FEIN) for reserve units. As such, the auditor concluded that the compensation was not attributable to National Guard service.

This case is similar to the facts in Public Document (P.D.) 16-129 (6/22/2016). In that determination, the Department observed that information provided on the Form W-2 suggested the taxpayer’s income derived from reserve duty. The Department also found that salaries or wages paid to a member of a reserve component of the military may include a service member who was not a member of the Virginia National Guard. As such, it was incumbent on the taxpayer to provide additional information to support his claim that the income was earned as a member of the Virginia National Guard.

In this case, the husband’s Form W-2 was issued by DFAS using the federal employer identification number (FEIN) for reserve units. The Taxpayers, however, submitted documentation indicating that the husband served in the Virginia National Guard. As such, the Taxpayers were eligible to claim the subtraction for the husband’s National Guard pay on their 2018 Virginia return.

Basic Military Pay

Virginia Code § 58.1-322.02 15 provides military service personnel with a subtraction for up to $15,000 of basic military pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the individual exceeds $15,000 and is fully phased out when basic military pay reaches $30,000. The subtraction is available whether the individual is stationed inside or outside Virginia.

This subtraction was also disallowed by the Department. The Taxpayers have not provided any evidence that the husband was on extended active duty for more than 90 days. As such, the disallowance of the military pay subtraction is upheld.

Based on this determination, a revised bill will be issued which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections and public document 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/4111.B

Related Documents

11-133

16-129