August 27, 2019
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable year ended December 31, 2017.
FACTS
The Taxpayer filed a Virginia resident income tax return for the 2017 taxable year. The Department adjusted the Taxpayer’s federal adjusted gross income (FAGI), as reported on his Virginia return, based on W-2 information. As a result, the Taxpayer’s refund was reduced. The Taxpayer appeals, contending the income at issue was properly excluded from his FAGI as difficulty of care income.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income properly 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 § 58.1-322.01 through § 58.1-322.04.
IRC § 131 excludes qualified foster care payments from inclusion in the gross income of a foster care provider, under certain conditions. The IRS has clarified that this exclusion extends to payments received under a Medicaid waiver program under the difficulty of care provision of IRC § 131. The payments must be made to an individual care provider for nonmedical support services that were provided under a plan of care to an eligible individual living in the care provider’s home. See IRS Notice 2014-7, 2014-4 IRB 445.
The Taxpayer’s W-2 reported no wages for federal income tax purposes and no federal income tax was withheld, consistent with the reporting of the difficulty of care income exclusion. Thus, the Taxpayer’s federal return reported no taxable wages. Because the Taxpayer reported no other sources of income, his FAGI was reported as zero on his federal return. The Taxpayer’s Virginia return reported a FAGI of zero to match the federal return. Under review, the Department found that the Taxpayer’s W-2 included an amount reported as state wages and state income tax withheld and issued an assessment. The fact that state wages were reported on the W-2 and state income tax was withheld has no bearing on whether the income was properly excluded from FAGI. Because Virginia starts its computation of taxable income with FAGI, income is not subject to Virginia income tax to the extent it is properly excludable from FAGI. Accordingly, the adjustment is reversed and a refund will be issued as warranted.
The Code of Virginia sections 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/1937.A