I moved from Virginia to California partway through the year and paid tax to both states on my wages -- can I claim a credit on my Virginia part-year return for the California tax I paid?

Plain-English summary

A taxpayer was a Virginia resident for part of 2021 before moving to California in November. He filed a Virginia part-year resident return and a California nonresident/part-year resident return, and claimed a credit on his Virginia return for income tax paid to California. The Department disallowed the credit and issued an assessment; the taxpayer appealed, arguing that disallowing it would result in double taxation.

The part-year-residency wrinkle didn't actually apply here. Virginia Code § 58.1-303 generally bars part-year residents from crediting Virginia tax against tax paid to the state they move into during the year -- but only for people who move into Virginia mid-year, not people (like this taxpayer) who move out. So that specific restriction wasn't the real obstacle.

The real issue: California has a reciprocal-credit arrangement with Virginia. Virginia's general credit statute (Va. Code § 58.1-332 A) lets residents credit tax paid to another state -- but that credit is unavailable whenever the other state's own law already grants a Virginia resident a credit "substantially similar" to Virginia's. California is one of only four jurisdictions (along with Arizona, Oregon, and the District of Columbia) with that kind of reciprocal setup. In practice, this flips which return the credit belongs on: a Virginia resident claims the credit for California tax on their California nonresident return, not their Virginia return, and a California resident claims the reverse credit on their Virginia nonresident return.

Applying that here. For the period the taxpayer was still a Virginia resident, any tax he owed California on California-source income should have been credited on his California return, not his Virginia one. And for the period after he'd already become a California resident, no Virginia credit was available at all, because Virginia doesn't tax a nonresident's non-Virginia-source income in the first place -- there was no Virginia tax on that later income to credit against.

A side issue: inconsistent income reporting. The Department also noticed the taxpayer had reported meaningfully different amounts of California-source wage income on his two states' returns. Comparing the attached W-2s, it found no actual double taxation (each showed withholding for one state or the other, not both) -- but flagged the discrepancy and invited the taxpayer to review his returns and file amendments if he'd made a reporting error.

Outcome. The credit was properly denied, and the assessment was upheld -- the fix for any double-taxation concern was to claim the offsetting credit on the California return, not the Virginia one.

What this means for you

Anyone splitting a tax year between Virginia and California, Arizona, Oregon, or D.C.

These four jurisdictions have reciprocal credit arrangements with Virginia. If you're a part-year or nonresident with income taxed by both, double-check which return the credit belongs on -- it may not be the one you'd expect, and claiming it on the wrong return will get it denied even though you're not actually being double-taxed.

Part-year residents with income from multiple employers in different states

Make sure the amounts you attribute to each state are consistent across your returns, or at least reconcilable from your W-2s -- a mismatch invites Department scrutiny even where there's ultimately no real double taxation.

Common questions

Q: I moved from Virginia to California mid-year and paid tax to both -- can I claim a credit on my Virginia return for the California tax?
A: Generally no. California has a reciprocal-credit arrangement with Virginia, so the credit belongs on your California return instead, not your Virginia one.

Q: Which states have this reciprocal-credit relationship with Virginia?
A: Arizona, California, Oregon, and the District of Columbia, as of this ruling.

Q: Does the part-year-resident credit restriction in Va. Code § 58.1-303 apply to people moving out of Virginia?
A: No -- that specific restriction only applies to people who move into Virginia during the year, barring them from crediting Virginia tax against tax paid to their prior state of residence for the pre-move portion of the year.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-303 -- part-year resident taxation; credit restriction for taxpayers moving into Virginia during the year
• 23 VAC 10-110-40 -- computation of a part-year resident's Virginia taxable income
• Va. Code § 58.1-332 -- credit for taxes paid to another state, including the reciprocal-credit bar and the special credit for residents of reciprocal states

Prior rulings referenced (described here, not linked): P.D. 97-301 (7/7/1997) -- credit limitation formula; P.D. 17-50 (4/6/2017) -- no Virginia credit for a part-year resident's post-domicile-change income taxed by the new state.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-19

Original ruling text

March 13, 2024

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2021. I apologize for the delay in responding to your appeal.

FACTS

During the 2021 taxable year, the Taxpayer was a Virginia resident until he moved to California in November. The Taxpayer filed a 2021 part-year Virginia resident return and a 2021 California nonresident/part-year resident return. On his Virginia return, he claimed a credit for income tax paid to California. The Department disallowed the credit and issued an assessment. The Taxpayer appeals the assessment, contending that disallowing the credit would result 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). Part-year residents who cease residing in Virginia during a taxable year and meet the filing threshold of Virginia Code § 58.1-321, must file a Virginia part-year return.

In this case, the Taxpayer worked for the multiple employers in Virginia and California, and he filed part-year returns in both states. The Taxpayer asserts he was double taxed on a Form W-2 from one of his employers. The W-2s attached to his return show either income tax withheld from California or Virginia, but not both. Accordingly, the documents provided show no double taxation.

A review of the returns, however, indicate that different amounts of wage income attributable to California were reported. The taxpayer attributed significantly more income to California on his California return than on his Virginia return. While attribution rules for states may vary resulting in different amounts included on part-year returns of different states, it is incumbent upon a taxpayer to accurately report income their returns.

Credit for Taxes Paid to another State

Generally

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. 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).

Part-Year Residency

Notwithstanding the provisions of Virginia Code § 58.1-332, Virginia Code § 58.1-303 prohibits part-year residents 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. This restriction, however, is limited to taxpayers who move into Virginia during the taxable year. See Virginia Code § 58.1-303 A.

Virginia Code § 58.1-303 B applies to taxpayers who begin a taxable year as a resident of Virginia but change their domicile during the year. The restriction described in Virginia Code § 58.1-303 A does not apply to such taxpayers. Regardless, they would not be able to claim a credit on their part-year Virginia returns for tax paid on any income they earned after they changed their domicile to a different state or country, because no Virginia tax would be due on a residency basis on such income and any Virginia source income earned as a nonresident would not be eligible for the credit. See Virginia Code §58.1-332 A and P.D. 17-50 (4/6/2017).

Reciprocal Credit Provisions

In addition, Virginia Code § 58.1-332 A provides:

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 subsection B of this section.

Under Virginia Code § 58.1-332 B, a nonresident is permitted to claim a credit against tax on income from Virginia sources when their state of residency provides a substantially similar credit to Virginia residents or imposes a tax upon their income derived from Virginia sources but does not tax income earned in the state by Virginia residents. Because it is dependent on another state granting a similar or reciprocal credit, it may be limited by the credit permitted by the other state. Currently, only residents of Arizona, California, Oregon and the District of Columbia may qualify for this credit.

Generally, 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.

Taking these rules together, the Taxpayer would not be eligible to claim a credit on his part-year Virginia return for any tax paid to California on income that was earned after his Virginia residency end date in November 2021. Further, the Taxpayer would also not be eligible to claim a credit for any tax paid to California on California source income the Taxpayer earned while he was a resident of Virginia. Rather, the Taxpayer should have claimed a credit on his California return for any tax paid to Virginia on such income.

Accordingly, the Taxpayer’s request to be allowed a credit for income tax paid to California is denied, and his request for the abatement of the assessment issued for the taxable year ended December 31, 2021, cannot be granted. The Taxpayer will receive an updated bill, which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

As indicated above, however, the Taxpayer may wish to review his returns in order to verify the accuracy of the income attribution amounts on his California and Virginia returns. If he determines there was an error on one or both returns, the Taxpayer may file amended returns to reflect the corrected income tax liability within the statutory period of limitations.

The Code of Virginia sections, regulation 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/4416.B

Related Documents

97-301

17-50