Tax Type
Individual Income Tax
Description
Mistaken interpretation of 760 instructions on tax credit paid to another state
Topic
Computation of Tax
Credits
Residency
Date Issued
09-17-2004
September 17, 2004
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 "Taxpayers") for the 2000 taxable year. I apologize for the delay in this response.
FACTS
The Taxpayers, a husband and wife, are Virginia residents who filed a Virginia resident income tax return for the 2000 taxable year. On their return, the Taxpayers claimed a credit for income tax paid to another state equal to the amount of income tax withheld by the husband's employer in Georgia. The Taxpayers filed their 2000 Georgia income tax return and received a refund for income tax withheld in excess of their tax liability.
The Taxpayer's 2000 Virginia return was audited by the Department and the credit for income tax paid to another state was adjusted to reflect the actual amount of income tax paid to Georgia (i.e., the income tax withheld less the amount of the refund). The Department issued an assessment for additional income tax and interest.
The Taxpayers contest the Department's assessment on the basis that they mistakenly interpreted the Form 760 instructions in reporting the credit. They contend that the instructions can be interpreted to allow the credit for the income tax withheld and remitted to the other state. As such, they request that their assessment be abated because they followed the Form 760 instructions. In the alternative, the Taxpayers ask that interest be waived because the Form 760 instructions are confusing.
DETERMINATION
Credit - Income Tax Paid to Another State
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 on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations where they are taxed by both Virginia and another state on these types of income.
As a general rule, the credit for income tax paid to another state 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.
Line 10 of Form 760 instructs taxpayers to "[E]nter the amount of tax paid to a state other than Virginia . . . ." [Emphasis added.] You believe that the Department's instructions for the credit for taxes paid to another state are misleading. I do not agree. The statute clearly sets forth the meaning of "tax paid" to another state.
In the Taxpayer's specific case, the Georgia return clearly provides for the calculation of the Taxpayer's actual income tax liability and the refund of tax that has been overpaid. Because Georgia refunds any amount that exceeds the actual liability, the credit for income tax paid to Georgia clearly would be limited to the actual tax paid.
Interest
Virginia Code § 58.1-1812 mandates the application of interest to any assessment of tax by providing that:
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- If the Tax Commissioner ascertains that any person has failed to make a proper return or pay in full any proper tax he shall assess the taxes prescribed by law. . . In addition thereto, interest on the outstanding tax and penalty shall be charged at the rate established under § 58.1-15 for the period between the due date and the full payment.
The application of interest to tax underpayments is mandatory under state law and cannot be waived unless the associated tax is adjusted. Because the tax in this case is properly assessed, there is no basis to waive any portion of the interest.
The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/50577B
Rulings of the Tax Commissioner