My pension contributions were taxed by another state before I moved to Virginia — can I subtract part of my pension payments on my Virginia return, and how do I compute it?

Plain-English summary

A retiree who now lives in Virginia asked the Department for a ruling on his pension. He had worked for a State A government employer (the name is redacted) and contributed to its employee pension plan; he has begun receiving annuity payments from that plan. He asked whether any portion of those payments can be subtracted in computing his Virginia taxable income — and, if so, which method to use.

The framework. Virginia conforms to federal law: the Virginia income computation starts from federal adjusted gross income (Va. Code § 58.1-301), so income included in a Virginia resident's FAGI is taxed by Virginia unless a specific Virginia modification exempts it. One such modification is the retirement income subtraction in Va. Code § 58.1-322.02 11: income from a qualified pension, profit-sharing, or stock bonus plan (IRC § 401), an IRA or annuity (IRC § 408), a deferred compensation plan (IRC § 457), or any federal government retirement program qualifies — but only if the contributions pass a two-part test:

1. the contributions were deductible for federal income tax purposes, and
2. the contributions were subject to income tax in another state.

The point is basis recovery: if another state already taxed the money going in, Virginia lets you take it back out tax-free — but only up to the amount that was previously taxed.

Two computation methods, keyed to the account type:

• Changing-value accounts (IRAs, IRC § 401(k) or § 403(b) accounts): use the basis recovery method of P.D. 10-214 (9/15/2010) — multiply the year's distributions by the ratio of previously taxed contributions to the sum of the year-end account value plus the year's distributions.
• Determinable periodic payments from a traditional pension (this case): use the simplified method of IRC § 72(d)(1)(B), per P.D. 15-104 (5/12/2015) — divide the previously taxed contributions (the investment in the contract at the annuity starting date) by the designated number of anticipated monthly payments; that fixed slice of each monthly payment is subtractable, multiplied by the number of payments received during the year.

The ruling. The taxpayer's contributions were deductible federally and taxed by State A, so he qualifies for the subtraction and must use the simplified method because his pension pays equal monthly amounts. The Department enclosed an amortization schedule showing the allowable subtraction each year until the previously taxed contributions are fully recovered — after that, the distributions become taxable in full. The subtraction is reported as an "other" subtraction on Virginia Schedule ADJ using Code 31, and the taxpayer was told to review his 2023 return and file an amended return if he had claimed the wrong amount.

What this means for you

Retirees moving to Virginia

If you contributed to a retirement plan while working in a state that taxed your contributions (even though they were deductible on your federal return), Virginia will not tax that money a second time when it comes back out. But the subtraction is not a blanket pension exemption — it recovers only the previously taxed contributions, and once they are used up, your payments are fully taxable in Virginia. Keep records proving what you contributed and that the other state taxed those contributions.

Accountants and preparers

Pick the method by the payment type, not by preference: changing-value accounts (IRA, 401(k), 403(b)) use the P.D. 10-214 basis-recovery ratio, while fixed periodic pension annuities must use the IRC § 72(d)(1)(B) simplified method. Claim the result as an "other" subtraction, Code 31, Schedule ADJ. If a client has been claiming it incorrectly, amend — the Department in this ruling directed the taxpayer to check his prior-year return and amend if needed.

Anyone with a mix of retirement accounts

The two-part test is applied to the contributions, not the distributions: they must have been federally deductible and taxed by another state. Contributions that were never taxed by another state generate no subtraction, no matter where you lived when you made them.

Common questions

Q: Another state taxed my pension contributions — does Virginia tax my distributions anyway?
A: Virginia taxes what is in your federal adjusted gross income, but Va. Code § 58.1-322.02 11 lets you subtract distributions to the extent the plan contributions were both federally deductible and subject to another state's income tax — so the previously taxed portion comes out tax-free until it is fully recovered.

Q: How do I know which computation method to use?
A: It depends on the payments. Fixed, determinable periodic payments from a traditional pension use the federal simplified method (IRC § 72(d)(1)(B)): previously taxed contributions divided by the designated number of anticipated monthly payments. Distributions from accounts with changing values — IRAs, 401(k)s, 403(b)s — use the basis-recovery ratio the Department set out in P.D. 10-214.

Q: Does the subtraction continue for as long as I receive the pension?
A: No. It continues only until you have recovered the full amount of your previously taxed contributions. After that point, the distributions become taxable in full.

Q: Where do I claim it on my Virginia return?
A: As an "other" subtraction on Virginia Schedule ADJ, using Code 31.

Citations and references

Statutes:

• Va. Code § 58.1-301 — Virginia conformity to the Internal Revenue Code; Virginia taxable income starts from federal adjusted gross income
• Va. Code § 58.1-322.02 11 — subtraction for qualified retirement income to the extent contributions were federally deductible but subject to income tax in another state
• IRC § 401, § 408, § 457 — the qualified plan types covered by the subtraction
• IRC § 72(d)(1)(B) — the federal simplified method for periodic pension payments

Authorities the Department relied on (described here, not linked): P.D. 10-214 (9/15/2010) (basis recovery method for changing-value retirement accounts) and P.D. 15-104 (5/12/2015) (the simplified method applies to determinable periodic pension payments).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-66

Original ruling text

May 14, 2025

Re: Ruling Request: Individual Income Tax

Dear *:

This will respond to your letter in which you (the “Taxpayer”) request a ruling as to what extent your pension distributions qualify for Virginia’s retirement income subtraction.

FACTS

The Taxpayer was employed by the ** (State A) and made contributions to its employee pension plan. He is now a Virginia resident and has begun receiving annuity payments from the pension plan. The Taxpayer requests a ruling regarding whether he can subtract any portion of his annuity payments in computing his Virginia taxable income, and, if so, what method he should use to determine the subtraction.

RULING

Virginia Code § 58.1-301 provides, with certain exceptions, that 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 .

Virginia Code § 58.1-322.02 11 provides a subtraction for any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by IRC § 401, an individual retirement account or annuity established under IRC § 408, a deferred compensation plan as defined by IRC § 457, or any federal government retirement program, the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state. Before taxpayers are permitted to subtract any portion of their retirement income, contributions to the retirement plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must have been subject to income tax in another state.

In Public Document (P.D.) 10-214 (9/15/2010), the Department established a basis recovery method to determine what part of a distribution from a retirement account with changing account values, such as individual retirement accounts or accounts established under IRC § 401(k) or § 403(b), qualifies for the subtraction. Using this method, a taxpayer would determine the subtraction by multiplying the total amount of the annual distribution(s) by a ratio equal to the total balance of previously taxed contributions divided by the sum of the value of the retirement account at the end of the taxable year plus the total amount of the annual distribution(s).

The Department has also ruled that the simplified method described under IRC § 72(d)(1)(B) must be used to determine what part of a determinable periodic payment from a traditional pension plan qualifies for the subtraction. See P.D. 15-104 (5/12/2015). Under this method, the investment in the contract as of the annuity starting date (the total contributions previously taxed) is divided by a designated number of anticipated monthly payments to determine what portion of the monthly payment qualifies for the subtraction. Assuming annuity payments are made monthly, such amount would be multiplied by the number of months an annuitant receives payments during the taxable year to determine the total subtraction for that year.

Based on the information provided, the Taxpayer made contributions to a pension plan that were deductible for federal income tax purposes and subject to income tax in State A. The Taxpayer has begun receiving distributions from the pension plan in equal monthly payments. As such, the Taxpayer qualifies for the retirement income subtraction, and he should use the simplified method to determine what part of the distributions is subtractable.

An amortization schedule is enclosed which indicates the allowable subtraction per year until the Taxpayer has fully recovered the previously taxed contributions, at which time the distributions become taxable in full. The Taxpayer should review his 2023 Virginia individual income tax return to confirm that he correctly calculated the subtraction, which should be reported as an “other” subtraction on Virginia Schedule ADJ using Code 31. If the claimed subtraction was incorrect, he should file an amended return.

This ruling is based on the facts provided by the Taxpayer and summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections 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 ruling, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Enclosure

AR/4859.Q

Related Documents

10-214

15-104