July 19, 2017
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond 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, 2013. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a resident of Virginia, worked in Maryland during the 2013 taxable year. The Taxpayer's employer withheld Maryland income tax, and the Taxpayer filed a Maryland individual income tax return. The Department received information from the Internal Revenue Service (IRS) that the Taxpayer may have income subject to Virginia income tax. Under audit, the Department issued an assessment for the taxable year at issue. The Taxpayer appealed the assessment contending his employer withheld Maryland income tax and Virginia should allow a tax credit for the income tax paid to Maryland.
DETERMINAITON
Reciprocity
Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia and Pennsylvania.
In this instance, the Taxpayer filed a nonresident income tax return and reported all of his income to Maryland. Under the Reciprocal Income Tax Agreement Between Commonwealth of Virginia and State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only.
If a Virginia resident has Maryland income tax withheld from wages earned while commuting to work in Maryland, the taxpayer should file an income tax return with Maryland in order to receive a refund.
Out-of-State Tax Credit
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 or gain on the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997).
The Taxpayer contends he should be allowed a tax credit on his Virginia return, because income tax was paid to Maryland. Under Virginia law, however, it is only when this reciprocal agreement does not apply that an individual may be eligible for the credit for income tax paid to another state.
CONCLUSION
Because the Taxpayer was not a resident of Maryland in 2013 and his income from the Maryland employer consisted only of wages, the Taxpayer was exempt from income taxation by Maryland under the reciprocal agreement. Further, he was not eligible to claim a credit for income tax paid to Maryland on his Virginia income tax returns.
Accordingly, the assessment for the 2013 taxable year is upheld. An updated bill will be issued shortly. The Taxpayer should remit payment for the outstanding balance within 30 days of the bill date to avoid any collections actions. If the Taxpayer paid income tax to Maryland, he should request a refund from that state.
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 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/863.D