August 31, 2022
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 ***** and ***** (the “Taxpayers”) for the taxable year ended December 31, 2018.
FACTS
The Taxpayers, a husband and wife, were residents of Virginia during the taxable year at issue. The Taxpayers claimed subtractions for the husband’s National Guard and military basic pay on their 2018 Virginia individual income tax return. Under audit, the Department allowed the subtraction for National Guard compensation, but disallowed the subtraction for basic military pay and issued an assessment. The Taxpayers appeal, contending that they may claim the subtraction for basic military pay.
DETERMINATION
Title 58.1 of the Code of Virginia currently provides three subtractions for military compensation. Military servicemembers may be eligible for a subtraction for (1) military pay and allowances earned while serving in a combat zone or qualified hazardous duty area (Virginia Code § 58.1-322.02 13); (2) military basic pay for personnel on extended active duty for periods in excess of 90 days (Virginia Code § 58.1-322.02 15); and (3) wages or salaries received for active and inactive service in the National Guard of the Commonwealth (Virginia Code § 58.1-322.02 8). Servicemembers may be eligible for more than one subtraction, but the same income may not be included in more than one subtraction.
Further, all of the subtractions under Virginia Code § 58.1-322.02 are prefaced by the words “to the extent included in federal adjusted gross income.” As such, no military compensation excluded from FAGI can be used to claim a military subtraction in computing Virginia taxable income. See also Public Document (P.D.) 11-133 (7/25/2011).
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 taxpayer 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 of Virginia. In P.D. 20-98 (6/2/2020), the Department ruled that only military pay for the period of time a servicemember served more than 90 consecutive days may be claimed for the subtraction. In addition, for purposes of applying the phase-out, only the amount of basic pay earned while on extended active duty is considered.
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, the National Guard personnel may only claim the subtraction if their rank is captain (O3) or below.
The husband’s military orders and leave and earnings statements show that he was on active duty for more than 90 consecutive days and his basic pay did not exceed $15,000 during this time. Therefore, the Taxpayers were eligible for the full subtraction for basic military pay earned while on extended active duty that they claimed on their 2018 Virginia income tax return.
Further, it appears that the husband earned enough additional pay during that part of the 2018 taxable year in which he was not on extended active duty to qualify for the subtraction for National Guard pay under Virginia Code § 58.1-322.02 8. As such, this subtraction was correctly allowed by the Department.
Because the Taxpayers were eligible to claim the basic military pay subtraction, however, the assessment for the taxable year ended December 31, 2018 will be abated.
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 website. 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/3981.B