Subtractions: Unemployment Benefits - American Rescue Plan Act (ARPA)
May 5, 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 ***** (the “Taxpayer”) for the taxable year ended December 31, 2020.
FACTS
The Taxpayer received unemployment compensation during the 2020 taxable year. This income was not included in federal adjusted gross income (FAGI) reported on her federal income tax return pursuant to the American Rescue Plan Act (ARPA). The Taxpayer reported the same FAGI as the starting point for computing Virginia taxable income (VTI) and claimed a subtraction for it, however, on her 2020 Virginia individual income tax return. Under review, the Department added the amount of unemployment compensation excluded from FAGI and issued an assessment. The Taxpayer appealed, contending her unemployment compensation was not taxable.
DETERMINATION
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 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 VTI with 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.
Unemployment benefits are generally included in a taxpayer’s FAGI. See IRC § 85(a). Virginia Code § 58.1-322.02 17 allows a taxpayer to subtract the amount received for unemployment benefits that are taxable pursuant to IRC § 85. The ARPA, however, excluded the first $10,200 of unemployment benefits from gross income for each taxpayer with income less than $150,000 for any taxable year beginning in 2020. See Title IX, § 9042(a) of the ARPA, P.L. 117-2 (March 11, 2021). See also IRC §85(c)(1).
In 2003, Virginia began conforming to the IRC as of a specific or fixed date. Since then, the General Assembly has enacted legislation to move the date of conformity forward each year. Effective for taxable years beginning on and after January 1, 2020, Virginia’s conformity date was advanced from December 31, 2019 to December 31, 2020, with a number exceptions. See Virginia Tax Bulletin (VTB) 21-4 (3/15/2021).
The ARPA, which included that allowed taxpayers with adjusted gross incomes of less than $150,000 to exclude up to $10,200 in unemployment compensation from their gross income in 2020, was not enacted until March 11, 2021. Because Virginia only conformed with the IRC through December 31, 2020, the provisions of the ARPA were not in effect for 2020 individual income tax returns.
In addition, Virginia’s conformity date was advanced from December 31, 2020 to December 31, 2021, with the provision that most of the provisions would only be available for the 2021 taxable year. See VTB 22-1 (2/23/2022). Thus, the $10,200 unemployment compensation exclusion was not available for individuals on their 2020 Virginia returns.
In this case, the Taxpayer excluded her unemployment benefits from her taxable income on her 2020 federal return in accordance with the ARPA, but failed to add it back on the 2020 Virginia return. Allowing both an exclusion from FAGI and permitting a subtraction on the Virginia return for unemployment compensation would essentially allow the Taxpayer a double benefit by allowing subtraction for compensation that was not even included in total income. As such, the Department was correct in adding the unemployment benefits back to FAGI for purposes of computing the Taxpayer’s VTI. The assessment, therefore, is upheld.
The Taxpayer will receive an updated bill, which will include accrued interest to date. The Taxpayer should remit payment within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and tax bulletins 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/4053.B