05-42 | Virginia Tax

Tax Type

Individual Income Tax

Description

Domiciliary residents barred from claiming an out-of-state tax credit

Topic

Credits

Date Issued

03-24-2005

March 24, 2005

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the adjustment to the Virginia individual income tax return filed by ***** (the "Taxpayers") for the taxable year 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayers, a husband and wife, are domiciliary residents of ***** ("State A"). During 2002, the husband states that he lived in Virginia for employment purposes. The husband was subject to Virginia individual income taxation as a resident because he resided in Virginia for more than 183 days during the taxable year. The Taxpayers filed a joint resident Virginia individual income tax return and claimed a credit for income taxes paid to State A.

The Department disallowed the credit on the Taxpayers' return. The Taxpayers were also barred from claiming an out-of-state tax credit on their State A return. The Taxpayers request that the Department allow the credit because they have paid individual income tax to two states on the same income.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid to another state provided the income is either earned or business income . . . for the taxable year, derived from sources outside the Commonwealth and subject to taxation under this chapter. Further, this Code section states:

- 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 . . . this section.

The husband was a domiciliary resident of State A and an actual resident of Virginia. As such, he was taxable as a resident by both Virginia and State A. Virginia disallowed the out-of-state tax credit on the resident individual income tax return. State A law specifically denies such a credit. The Taxpayer, therefore, paid individual income tax to two states on the same income.

As a general rule, Virginia does not allow a resident to claim an out-of-state tax credit on the Virginia individual income tax return for taxes paid to State A because State A, a reciprocity state, allows a Virginia resident to claim the credit on his State A nonresident return. (Similarly, a State A resident would claim the credit for tax paid to State A on his Virginia nonresident return.) State A, however, does not allow a credit on its resident return when the income earned by a Virginia resident is derived from sources outside Virginia.

In this case, the husband claims that he was actually employed in ***** ("State C"), which does not impose income tax on nonresidents. State A law specifically precludes allowance of the credit for income tax paid to Virginia on income earned outside Virginia.¹ Conversely, Virginia law does not prohibit such a credit. As such, a credit would be allowed on the Taxpayers' Virginia resident income tax return if the income were earned in State C.

The husband reports that he was employed in State C while residing in Virginia. His Form W-2, attached to the Virginia income tax return, reflects the address of his employer's payroll office in ***** ("State D"). The husband has not provided sufficient documentation showing that his place of employment was in State C. Without proof that the husband earned the salaries and wages in State C, the Department cannot grant the credit.

In accordance with these requirements, credit for individual income tax paid to State A will be allowed if the husband provides evidence showing that the income in question was earned in State C. The documentation must be furnished within 30 days from the date of this letter. Please send the information to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****.

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.policylibrary.tax.virginia.gov. If you have any questions about this determination, please contact ***** at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/48002E

¹ It is assumed that the public policy behind the ***** law was intended to apply to a circumstance where the taxpayer worked regularly in another state, but not as a daily commuter, as appears to be the case here. Thus, it would not seem to have been intended that the law apply to the unusual circumstance where a large metropolitan area might draw its workers from three contiguous state jurisdictions, all in normal commuting distance of each other. Nonetheless, the law of State A makes no exception for this relatively unusual circumstance.

Rulings of the Tax Commissioner