August 2, 2019
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 “Taxpayer”) for the taxable year ended December 31, 2017.
FACTS
The Taxpayer filed a Virginia resident individual income tax return for the 2017 taxable year and subtracted the income she received as an employee of the Commonwealth of Virginia. The Department denied the subtraction on the basis that the Taxpayer received more than $15,000 in salary from all employment and issued an assessment. The Taxpayer appeals, contending she was entitled to claim the subtraction because she had less than $15,000 in income that should have been considered salary.
DETERMINATION
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell’s Motor Freight, Inc. et al. v Virginia Dep’t of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
Virginia Code § 58.1-322.02 16 allows for a subtraction for:
The first $15,000 of salary for each federal and state employee whose total annual salary from all employment for the taxable year is $15,000 or less.
The statutory language first grants a subtraction (“the first $15,000 of salary for each federal and state employee”) then imposes a restriction (“whose total annual salary from all employment for the taxable year is $15,000 or less”). If the Taxpayer was a “federal or state employee”, then she is granted the subtraction, subject to the limiting condition imposed by the last clause.
The documentation provided verifies that the Taxpayer was a state employee. As such, the subtraction was available to the Taxpayer, subject to the $15,000 limitation. During the 2017 taxable year, the Taxpayer received $10,000 in wages from her employment with the Commonwealth, which was reported on a Form W-2. The Taxpayer also received $17,500 in scholarships. A $1,500 scholarship was reported on a Form 1099. The Taxpayer also had $16,000 in scholarship income that was not reported on either a Form W-2 or a Form 1099.
The Department has construed the subtraction limitation to include all income reported on a W-2 for the taxable year. See Public Document (P.D.) 09-17 (2/4/2009). The Internal Revenue Code (IRC) § 117 addresses the taxability of scholarships and grants. Amounts received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization are not included in gross income. See IRC § 117 a. A qualified scholarship means any amount received as a scholarship to the extent the individual establishes that such amount was used for tuition and fees requested for enrollment, or fees, books, supplies and equipment required for courses. See IRC § 117 b 2. Amounts received as scholarship funds and used for incidental expenses, such as room and board, travel and optional equipment are includable in gross income. However, such amounts are not considered wages unless they are received as payments for teaching, research or other services required as a condition for receiving the scholarship. See Treas. Reg. § 1.117-2 a.
Based on information provided by the Taxpayer, the income reported on the Form W-2 were payments received for her services as a teaching assistant. The $1,500 scholarship reported on the Form 1099 was used to pay tuition and fees required for her enrollment, which was appropriately excluded from her gross income. The $16,000 scholarship was used to pay incidental expenses, such as room and board, but was not received in payment of services performed. While these scholarship funds were includable in the Taxpayer’s gross income, such income merely helped fund her education by covering her living expenses. Because the funds were not compensation for services reported on Form W-2, the Department does not consider it to have been income earned as salary.
The Taxpayer received $10,000 in wages, which did not exceed the $15,000 limitation. The Taxpayer was, therefore, eligible to claim the subtraction, and the assessment will be abated.
The Code of Virginia sections and public documents 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/1886.A