April 19, 2018
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 taxable year ended December 31, 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia resident income tax return for the 2014 taxable year and a refund was issued. On the return, the Taxpayers claimed a subtraction for all of the husband's income.
Under review, the Department denied the subtraction, changed the wife's filing status to married filing a separate return and made adjustments to reflect income, deductions and exemptions attributable to the wife. An assessment was issued for additional tax and interest. The Taxpayers filed an appeal, contending the Department's assessment is erroneous because husband was a military service member domiciled outside Virginia.
DETERMINATION
Nonresident Spouse
When one spouse is a resident of Virginia and the other is a nonresident, the couple may elect to either compute Virginia taxable income jointly on a joint return or compute their Virginia taxable incomes separately on separate returns. See Virginia Code § 58.1-326. In this case, the Taxpayers filed a joint Virginia individual income tax return. Under this election, the husband would be required to compute his income as if he were a resident of Virginia. The Taxpayers, however, took a subtraction for the husband's income claiming he was not a resident of Virginia.
Because the Taxpayers filed a joint Virginia return, the Department's auditor could have simply denied the subtraction and issued an assessment in accordance with the election available under Virginia Code § 58.1-326. However, the husband was a military service member who was domiciled outside Virginia, and the Taxpayers had subtracted his income. Under these circumstances, the Department concluded the Taxpayers had not intended to file a joint Virginia return and issued an assessment based on the wife's separate income. The Department's finding is confirmed by the Taxpayers' assertion the husband was not a resident of Virginia during the taxable year at issue.
If spouses have filed a joint federal income tax return and not elected to file a joint Virginia income tax return, then items of income, deductions, and exemptions must be allocated for Virginia income tax purposes pursuant to the provisions of Virginia Code § 58.1-324. Specifically, Virginia Code § 58.1-324 C 1 states, “Income shall be allocated to the spouse who earned the income or with respect to whose property the income is attributable.” Further, Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon the income attributable to each. See also Public Document (P.D.) 95-251 (9/29/1995), P.D. 10-54 (5/7/2010), and P.D. 12-94 (7/11/2012).
In computing the separate liability of the wife, the Department disallowed the subtraction for the husband's income. However, the Department also reduced federal adjusted gross income, FAGI, by the same amount. In addition, the Department adjusted the standard deduction to reflect the separate filing and reduced exemptions claimed from three to one.
Standard Deduction
Any taxpayer who does not itemize deductions for federal purposes may claim a standard deduction in the computation of Virginia taxable income. Pursuant to Virginia Code § 58.1-322 D 1 b, the amount of the standard deduction is $3,000 for single taxpayers and $6,000 for married taxpayers filing jointly. When a spouse files a separate return, tax is being computed for a single individual. Under such circumstances, the spouse may only claim the standard deduction allowed to a single taxpayer.
Dependent Exemptions
For the 2014 taxable year, Virginia Code § 58.1-322 D 2 a permitted Virginia residents to deduct $930 for each personal exemption allowed on their federal income tax return. On their 2014 return, the Taxpayers claimed three personal exemptions. Because the wife was considered to be filing separately, the Department removed the husband's personal exemption. In addition, the dependent exemption was disallowed because it could not be determined whether it had been claimed on another state's return.
Under the provisions of Virginia Code § 58.1-324, a resident spouse and a nonresident spouse may mutually agree on the allocation of dependent exemptions. If the couple is unable to account separately for these deductions and exemptions, they must be allocated proportionally between each spouse based on income attributable to each. See Title 23 VAC 10-110-190 B. In P.D. 99-82 (4/21/1999), the Department ruled that when a spouse claims dependent exemptions on his/her separate state income tax return, such actions are considered to be separately accounted for and evidence of a mutual agreement between the husband and wife.
The fact that the Taxpayers claimed a dependent exemption on their joint Virginia return does not constitute clear evidence that the mutually agreed to allow the wife to claim such exemption on the wife's separate return. Further, if the husband could have claimed the dependent exemption on another state's return, the wife would not be able to claim the exemption on her Virginia return.
CONCLUSION
Based on the available information, the Department treated the Taxpayers as if they had elected to file a separate return for the wife as permitted under Virginia Code § 58.1-324. Under this rationale, only the wife's FAGI and the standard deduction for a single taxpayer were included in the computation of the wife's tax liability. In addition, because there was doubt as to which spouse was eligible to claim the dependent exemption, the Department denied the personal exemptions claimed for both the husband and the dependent. As such, the assessment must be upheld.
The Taxpayers will, however, be granted an opportunity to provide adequate documentation with regard to the dependent exemption. The documentation may include a certified copy of any other state in which the husband was required to file a return showing that he did not claim the dependent exemption, or evidence that he was not required to file in his state of residence.
In the alternative, the Taxpayers may elect to file an amended joint 2014 Virginia individual income tax return. Although the Taxpayers would not be able to subtract the entire amount of the husband's income from the joint FAGI, he may be eligible for one or more of the military income subtractions granted under Virginia Code § 58.1-322. Virginia currently provides three subtractions for military compensation. Military service members 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 § 58.1322 C 21); (2) military basic pay for personnel on extended active duty for periods in excess of 90 days (Virginia Code § 58.1-322 C 23); and (3) wages or salaries received for active and inactive service in the National Guard of the Commonwealth (Virginia Code § 58.1-322 C 11). Service members may be eligible for more than one subtraction, but the same income may not be included in more than one subtraction. See P.D. 13-222 (12/13/2013).
The documentation or amended 2014 Virginia income tax return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****. Upon receipt, the documents will be reviewed and assessment will be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered correct and collection action may result.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rule, and Decisions section of the Department's web site. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1106.D