We moved to Virginia partway through the year and paid income tax to our old state, another state where a bonus was sourced, and California -- can we credit all of that tax paid against our Virginia tax?

Plain-English summary

A husband and wife filed a part-year Virginia resident income tax return for 2022, having moved to Virginia from another state ("State A") in August 2022. On that return, they claimed a credit for income tax paid to three other jurisdictions: State A (where they also filed a 2022 part-year resident return), a second state ("State B," on a nonresident return), and California. The Department denied the entire credit and assessed tax; the couple sought correction, arguing the denial caused impermissible double taxation. The Department agreed in part.

The part-year residency rule. Va. Code § 58.1-303 taxes a part-year resident as a Virginian only for the portion of the year they actually lived in Virginia. Under 23 VAC 10-110-40, a part-year resident computes Virginia taxable income by attributing income, deductions, and modifications to the period of Virginia residence (reported on Form 760PY). A consequence of this rule: a part-year resident cannot claim credit, under the general credit statute (§ 58.1-332), for tax paid to their old state of residence on income earned while they lived in that state -- because that income was never taxed by Virginia as resident income in the first place, there's no double taxation to relieve for that portion (see P.D. 13-28). But a part-year resident can claim credit for tax that old state imposes on income received during the Virginia-residence period, if that income is also taxed by Virginia (see P.D. 18-36).

State A -- credit reinstated. The husband received a performance bonus during the Virginia-residence period, and his employer sourced a significant share of it to State A. The couple properly reported that Virginia-period bonus income as Virginia taxable income, and also reported it (along with their pre-move income) on their State A part-year return. Critically, they had claimed credit for only the State A tax attributable to the Virginia-residence-period bonus income -- exactly the portion the rule allows. Because they'd already done this correctly, the Department reinstated the State A credit.

State B -- credit reinstated. Consistent with the employer's sourcing of the bonus, the couple filed a State B nonresident return reporting the State B-sourced share. Because that same income was also taxed as Virginia income, the credit for State B tax was proper and reinstated.

California -- credit denied, and not for a documentation reason. Virginia Code § 58.1-332 B carves California out of the ordinary credit-for-tax-paid regime entirely: a Virginia resident generally cannot claim a credit on their Virginia return for tax paid to California, because California law instead lets the Virginia resident claim the credit on the California nonresident return. The arrangement runs both ways -- a California resident claims the credit for California tax on their Virginia nonresident return instead. So the couple's California credit wasn't just under-documented; it was never available on a Virginia resident return in the first place.

Bottom line. The assessment was adjusted to reinstate the State A and State B credits, with an updated bill (plus accrued interest) to follow. The California portion of the credit could not be granted at all.

What this means for you

Anyone who moves into Virginia partway through the year and pays tax to their old state

You generally cannot credit tax your old state charges on income you earned before you moved (there's no Virginia tax on that income to offset). You can credit tax that state charges on income you receive after becoming a Virginia resident, if Virginia also taxes it -- make sure your credit claim is limited to that Virginia-period share, as this couple's was.

Anyone with income sourced to multiple states by an employer (bonuses, relocation pay, etc.)

Track exactly which state(s) your employer sourced each piece of income to, and make sure any credit you claim lines up with income that both Virginia and the other state are taxing -- that alignment is what saved the State A and State B credits here.

Anyone who paid income tax to California and also owes Virginia tax on the same income

Don't claim the credit on your Virginia return. Virginia Code § 58.1-332 B specifically excludes California from the ordinary credit mechanism; instead, claim the credit for California tax on your California nonresident return (the reverse of the usual pattern, where the credit is normally claimed on the resident's home-state return).

Common questions

Q: I paid tax to my old state on income I earned before I moved to Virginia -- can I credit that against my Virginia tax?
A: Generally no. Virginia doesn't tax that pre-move income as resident income, so there's no double taxation for a credit to relieve. The credit is limited to tax paid on income received during your Virginia-residence period that Virginia also taxes.

Q: I paid California income tax and also owe Virginia tax on that income -- how do I avoid double taxation?
A: Not through a credit on your Virginia return -- Virginia Code § 58.1-332 B bars that. Instead, claim the credit for the California-sourced income on your California nonresident return.

Q: Does this same California carve-out work in reverse?
A: Yes -- per this ruling, a California resident claims credit for California tax on their Virginia nonresident return, rather than getting a credit on their California return.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-303 -- a part-year resident is taxable as a Virginia resident only for the portion of the year they resided in Virginia
• 23 VAC 10-110-40 -- a part-year resident's Virginia taxable income is computed by attributing income to the period of Virginia residence (Form 760PY)
• Va. Code § 58.1-332 A -- credit against Virginia income tax for tax paid to another state on earned/business income or capital gain, to relieve double taxation
• Va. Code § 58.1-332 B -- no Virginia credit for tax paid to California, because California instead allows the credit on its own nonresident return, and vice versa

Authorities the Department relied on (described here, not linked): P.D. 97-301 (7/7/1997) (the credit limitation formula); P.D. 13-28 (3/5/2013) (part-year residents can't credit tax paid to their old state on pre-move income); P.D. 18-36 (3/26/2018) (part-year residents can credit tax on Virginia-period income the old state also taxes).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-112

Original ruling text

November 14, 2024

Re: § 58.1-1821 Application: Individual Income Tax

Dear * and ***:

This will respond to your letter in which you seek correction of an assessment of individual income tax issued to * & *** (the “Taxpayers”) for the taxable year ended December 31, 2022.

FACTS

The Taxpayers, a husband and wife, filed a part-year Virginia resident income tax return for the 2022 taxable year claiming a credit for income tax paid to three other states. A portion of the credit claimed on their Virginia return was attributable to income tax paid to * (State A), a state where the Taxpayers also filed a 2022 part-year resident return. The remaining credit was attributable to tax paid to and ** (State B) as reported on nonresident returns. Under review, the Department denied the credit and issued an assessment. The Taxpayers filed an application for correction contending that disallowing the credit resulted in double taxation.

DETERMINATION

Part-Year Residency

Virginia Code § 58.1-303 provides that any individual who becomes a resident of another state during a taxable year shall be taxable as a Virginia resident for only that portion of the taxable year during which that person was a resident of the Commonwealth. Title 23 of the Virginia Administrative Code (VAC) 10-110-40 further explains that the Virginia taxable income of a part-year resident shall be computed by determining income, deductions, subtractions, additions, and modifications attributable to the period of residence in Virginia. As such, any individual who is a part-year resident of Virginia during a taxable year must attribute their income between their periods of residence in and outside of Virginia on a schedule of income filed with their return (Form 760PY).

The Taxpayers moved from State A to Virginia in August 2022. Consistent with this move, the Taxpayers filed a Virginia part-year resident income tax return, properly reporting the income received after their residency start date as Virginia taxable income.

Credit for Taxes Paid to another State

Generally

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income.

In most circumstances, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. 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. See Public Document (P.D.) 97-301 (7/7/1997).

Part-year Residency

Notwithstanding the provisions of Virginia Code § 58.1-332, part-year residents are prohibited from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. See Virginia Code § 58.1-303 and P.D. 13-28 (3/5/2013).

State A

As a result of this part-year residency rule, the Taxpayers could not claim credit for income tax paid to State A on any income they received while they were solely residents of State A in 2022. The Taxpayers, however, would have been able to claim credit for tax paid to State A on income received during the period they were residents of Virginia, provided the income was from State A sources. See P.D. 18-36 (3/26/2018).

The information provided indicates that the husband received a performance bonus during his period of Virginia residence, most of which his employer sourced to other states. The husband’s employer sourced a significant portion of this bonus to State A. When the Taxpayers filed their part-year State A return, they reported all of the income received while residents of State A, in addition to that portion of the bonus the husband’s employer sourced to State A.

In accordance with the Department’s policy, the Taxpayers were eligible to claim a credit for tax paid to State A on the portion of the bonus sourced to State A because they also properly reported all of the bonus income as taxable income received during their period of Virginia residence. Based on the information provided, it appears that the Taxpayers claimed credit for only that portion of tax paid on State A source income they received during their period of Virginia residency.

State B

Consistent with the employer’s sourcing of the performance bonus, the Taxpayers filed a nonresident return in State B to report the amount of income his employer attributed to State B. Because this income was also reported as taxable on their Virginia return, the Taxpayers were eligible to claim the credit for tax paid to State B.

California

Virginia law generally does not allow a resident to claim a credit on their Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on the California nonresident return. See Virginia Code § 58.1-332 B. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return. As such, the Taxpayers were not eligible to claim a credit for tax paid to California on their Virginia return.

CONCLUSION

For the reasons discussed above, the assessment will be adjusted to reinstate the credit claimed by the Taxpayers for tax paid to State A and State B. The credit for tax paid to California cannot be granted.

After the assessment has been adjusted, the Taxpayers will receive an updated bill that 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 collection actions.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at 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) or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

97-301

13-28

18-36