If I move to Puerto Rico and file a Puerto Rico resident return, does that automatically end my Virginia tax residency?

Plain-English summary

A taxpayer moved to Puerto Rico in 2017 but returned to Virginia in 2018 after a hurricane made conditions there difficult. She never filed a 2018 Virginia return, and after the IRS flagged a possible filing requirement and she didn't respond, the Department issued an assessment. She appealed, arguing she was a Puerto Rico resident, or alternatively that her Virginia-source income was too low to require filing.

The Department rejected both arguments. First, it explained that Puerto Rico's own residency tests -- the 183-day presence test, the "tax home" test, and the "closer connection" test used to determine bona fide Puerto Rico residency for federal tax purposes -- aren't a substitute for Virginia's own two-part domicile test (actual abandonment of the old domicile, plus establishing a new one elsewhere with intent to stay). The fact that Puerto Rico residents get a credit against their Puerto Rico return for U.S. federal tax paid actually suggests Puerto Rico is treated more like a foreign country than a U.S. state for this purpose -- so meeting Puerto Rico's residency tests doesn't prove she'd abandoned Virginia domicile.

Second, on the facts, she hadn't abandoned Virginia: she'd been a Virginia resident filing Virginia returns since 2003, owned a home there, and renewed her Virginia driver's license in 2018 (she didn't get a Puerto Rico license until 2022). Her own statements were also inconsistent -- she told a Department representative in 2019 that she'd lived in Virginia through December 2018, but later claimed she was only in Virginia 140 nights that year; and despite claiming 215 nights in Puerto Rico in 2017, she filed a full-year Virginia resident return for that year and reported zero personal-use days on a Puerto Rico rental property. She also never responded to the Department's requests for her federal return and Virginia voting history. On top of the domicile question, the Department noted that federal law bars a state from taxing retirement income based only on where it was earned, but a genuine Virginia resident is still taxable on retirement income received while a resident regardless of where the contributions were made -- so even her retirement income argument didn't help. The assessment was upheld.

What this means for you

People splitting time between Virginia and Puerto Rico (or another U.S. territory)

Qualifying as a "bona fide resident" of Puerto Rico under the federal tax tests doesn't automatically end your Virginia domicile. You still have to separately prove you actually abandoned Virginia -- with no intent to return -- and established Puerto Rico (or wherever) as your new permanent home, under Virginia's own two-part test.

Retirees relying on where retirement contributions were made

Federal law (4 U.S.C. § 114) stops a state from taxing a non-resident's retirement income just because it was earned there -- but it does nothing to protect retirement income received by someone who actually is a Virginia resident or domiciliary, even if the underlying work and contributions happened somewhere else entirely.

Anyone appealing a residency assessment based on incomplete or inconsistent records

This ruling shows how much weight the Department gives to a taxpayer's own inconsistent statements (conflicting day counts between what was told to a phone representative versus what was later claimed) and to a failure to respond to follow-up document requests. Both cut hard against the taxpayer's credibility and case.

Common questions

Q: I meet Puerto Rico's bona fide residency test -- doesn't that mean Virginia can't tax me?
A: Not automatically. Puerto Rico's residency tests (the 183-day presence test, tax-home test, and closer-connection test) serve a different federal purpose and don't substitute for Virginia's own domicile test, which requires proof you actually abandoned Virginia with no intent to return.

Q: Does keeping and renewing a Virginia driver's license hurt my case even if I've moved away?
A: Yes -- it's treated as a strong indicator of intent to retain Virginia domicile, especially if renewed during the period you claim to have already left.

Q: Is my retirement income protected from Virginia tax if I earned it while working in another state?
A: Not if you're a Virginia resident or domiciliary when you receive it. Federal law only bars a state from taxing a non-resident's retirement income based on where it was earned; it doesn't protect a genuine Virginia resident's retirement income.

Q: What happens if I don't respond to the Department's requests for more information during an appeal?
A: It works against you. Here, the taxpayer's failure to provide her federal return and voting history (both important domicile evidence) contributed to the Department upholding the assessment.

Citations and references

• Va. Code § 58.1-302 (domiciliary and actual resident definitions)
• Va. Code § 58.1-301 (Virginia's IRC conformity)
• IRC § 937 (Puerto Rico bona fide residency test); IRC § 933 (Puerto Rico source income exclusion)
• 4 U.S.C. § 114 / P.L. 104-95 (state taxation of nonresident retirement income barred)
• Va. Code § 46.2-323.1 (driver's license residency requirement)
• P.D. 13-89 (6/10/2013) (Puerto Rico tests not a domicile substitute)
• P.D. 02-118 (9/3/2002); P.D. 16-128 (6/22/2016) (retirement income taxable to VA resident regardless of source)
• P.D. 00-151; P.D. 02-149 (driver's license as domicile evidence)
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-86

Original ruling text

July 13, 2023

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2018.

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 2018 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. When a response was not received, the Department issued an assessment. The Taxpayer appeals, contending she was a resident of Puerto Rico. In the alternative. The Taxpayer contends that she did not have a Virginia filing requirement because her Virginia source income was below the filing threshold.

DETERMINATION

Taxation of United States Citizens Residing in Puerto Rico

An individual is considered a bona fide resident of Puerto Rico if they meet a presence test (including residing in Puerto Rico for more than 183 days during the tax year), they did not have a tax home outside Puerto Rico for any part of the tax year, and they did not have a closer connection to the United States (or another foreign country) than to Puerto Rico during any part of the tax year. Special rules apply to individuals who move to or from Puerto Rico during the tax year. See Internal Revenue Code (IRC) § 937.

United States citizens who are bona fide residents of Puerto Rico are required to file federal income tax returns if, among other things, they have income from sources outside Puerto Rico. This includes taxable social security benefits and retirement income if the services that contributed to the retirement income were performed in the United States. Income from sources within Puerto Rico would generally be exempt from the federal taxable income if the individuals were bona fide residents of Puerto Rico for the entire taxable year. See IRC § 933. In addition, taxpayers who are bona fide residents of Puerto Rico receive a credit on their Puerto Rico income tax return for taxes paid to the United States. See P.R. Laws tit. 13 § 30201.

In this case, the Taxpayer filed a 2018 Puerto Rico income tax return on the basis that she was a resident of Puerto Rico. The Taxpayer also filed a federal income tax return because her social security and retirement income was not considered Puerto Rico source income. In addition, the Taxpayer claimed credit for income tax paid to the United States on her Puerto Rico income tax return. None of these actions, however, are determinative as to whether or not the Taxpayer remained a domiciliary resident of a state in the United States. The fact that a Puerto Rico taxpayer can receive a credit for United States federal income tax paid means that, at least with regard to income tax, Puerto Rico is treated more like another country than a state. In addition, the tests used to determine Puerto Rico tax residency, namely the 183 day test, the tax home test, and the closer connection test, while they may involve factors that overlap with domicile, are not substitutes for the two-pronged standard that must be met in order for there to be a change of domicile. See Public Document (P.D.) 13-89 (6/10/2013).

Taxation of Virginia Residents

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 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 .

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-313, 57 S. Ct. 466, 467 (1937), the United States Supreme Court explained “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.”

The Taxpayer believes that her retirement distribution was not subject to tax in Virginia because she resided in another state when she made the contributions to the retirement account. Public Law (P.L.) 104-95, as codified at 4 U.S.C. § 114, prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. To the extent included in FAGI, retirement income received by an actual or domiciliary resident of Virginia would be included in the computation of Virginia taxable income regardless of where the taxpayer resided when the contributions were made. In PD. 02-118 (9/3/2002), the Department determined that, under P.L. 104-95, retirement income received by an actual resident of Virginia was subject to Virginia’s income tax even if the retirement income was derived from employment in the other state and the taxpayer remained a domiciliary resident of the other state. See also P.D. 16-128 (6/22/2016).

Virginia 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 they intend to return even though they may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon their 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 their 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 their 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 they have abandoned their Virginia domicile. If the information is inadequate to meet this burden, the Department must conclude that the taxpayer intended to remain indefinitely in Virginia.

The Taxpayer explains that she moved to Puerto Rico in 2017 but returned to Virginia in 2018 because of poor conditions that existed in Puerto Rico after a hurricane. The Taxpayer had been a Virginia resident and had filed Virginia resident income tax returns since 2003. She owned a personal residence in Virginia and continued to hold a Virginia driver’s license, which she renewed in 2018. She explains that she renewed the license because public services were limited in Puerto Rico at that time. She did not obtain a Puerto Rico driver’s license until 2022. In addition, she submitted her 2017 federal and Virginia returns in November 2018, listing her Virginia address as her home address.

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 he retains a Virginia driver’s license. See 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’s records indicate that the Taxpayer contacted a customer service representative in February 2019 to determine if she had a Virginia filing obligation. At that time, she told the representative that she had lived in Virginia through December 2018, and was advised that she would need to file a Virginia resident return for 2018. This statement seems to conflict with information she subsequently provided stating that she was in Virginia for just 140 nights in 2018. There is also conflicting information provided for the 2017 taxable year. The Taxpayer states she moved to Puerto Rico and spent 215 nights there in 2017. The Taxpayer, however, filed a full year Virginia resident return for the 2017 taxable year. In addition, on her 2017 federal Schedule E she reported rental income, and zero personal use days, from her Puerto Rico residence.

Further, by email dated February 3, 2023, and by letter dated March 7, 2023, the Department requested that the Taxpayer provide additional information, including her federal tax return and Virginia voting history, in an attempt to gain additional information so that the Department could make an informed decision concerning her residency status. The Taxpayers voting history, in particular, would be an important factor to consider in determining domiciliary intent. To date, the Taxpayer has failed to respond with the requested information.

CONCLUSION

The Department acknowledges that a change of domicile occurs as part of a process in which no single factor is dispositive. In this case, even if the Taxpayer’s connections with Puerto Rico were sufficient to indicate the intent to establish domicile there, the extent of her ongoing Virginia connections fails to indicate sufficient actions to fully abandon her Virginia domicile. As stated above, both requirements must exist concurrently for a change of domicile to have occurred. In addition, as explained above, retirement income received by a Virginia resident is properly included in Virginia taxable income. As such, the assessment for the 2018 taxable year is upheld.

The assessment at issue was made based on the best information available to the Department pursuant to Virginia Code § 58.1-111. The Taxpayer may have information that better represents her Virginia income tax liability for the year at issue. Therefore, the Taxpayer should file a 2018 Virginia resident income tax return to more accurately reflect her Virginia income tax liability.

The return should be submitted within 60 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the information or return will be reviewed and the assessment will be adjusted, as appropriate. If the information or return is not received within the allotted time, the assessment will be considered correct.

The Code of Virginia sections and public documents 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 (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4242.X

Related Documents

00-151

02-118

02-149

13-89

16-128