April 18, 2019
Re: § 58.1-1824 Application: Individual Income Tax
Dear Mr. *****:
This will reply to your letter in which you seek a refund of income tax paid by ***** (the “Taxpayer”) for the taxable years ended December 31, 2014, and 2015.
FACTS
The Taxpayer filed Virginia resident individual income tax returns for the 2014 and 2015 taxable years and claimed subtractions for the entire amount of income he received from a retirement account. In each case, the Department notified the Taxpayer that it was denying the subtraction and issuing assessments. Before the assessments were issued, the Taxpayer paid the proposed amounts of additional tax and interest due. The Taxpayer subsequently appealed, contending the information he provided to the Department supports the subtractions because his contributions to the account were previously taxed by Pennsylvania.
DETERMINATION
Protective Claim
Pursuant to the authority granted the Department under Virginia Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Virginia Code § 58.1-1821. As permitted by statute, the Taxpayer’s request has been treated as an appeal under Virginia Code § 58.1-1821.
Retirement Subtraction
Virginia Code § 58.1-301 provides that 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. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income 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 Virginia Code § 58.1-322.
Virginia Code § 58.1-322 C 19 provides a subtraction for any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by IRC § 401, an individual retirement account or annuity established under IRC § 408, a deferred compensation plan as defined by IRC § 457, or any federal government retirement program, the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state. Before taxpayers are permitted to subtract any portion of their retirement income, contributions to the retirement plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must still have been subject to income tax in another state. While the contributions made to a retirement account may be eligible for the subtraction under Virginia Code § 58.1-322 C 19, income generated by those contributions are not.
In Public Document (P.D.) 10-214 (9/15/2010), the Department recognized that Pennsylvania does not allow contributions made by an employee to a retirement plan to be excluded from income. That determination also established a pro-rata approach that accurately reflects the nature of a distribution from a retirement plan. Accordingly, a taxpayer who receives a distribution from a retirement plan as described in Virginia Code § 58.1-322 C 19 and whose contributions to such plan were subject to income taxation in another state would determine the portion of the annual distribution(s) eligible for the subtraction by multiplying the total amount of the annual distribution(s) by a ratio equal to the total balance of previously taxed contributions divided by the sum of the value of the retirement account at the end of the taxable year plus the total amount of the annual distribution(s).
The information provided indicates that the Taxpayer made contributions to a retirement account that were deductible for federal income tax purposes but subject to income tax in Pennsylvania. As such, the Taxpayer was eligible to subtract a portion of the taxable distributions he received from the account in 2014 and 2015. The Department has computed the allowable subtractions in accordance with the formula described in P.D. 10-214. Accordingly, the case will be returned to the audit staff to allow the subtractions in accordance with the enclosed schedule and issue refunds as warranted.
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 Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1733.M