April 28, 2020
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, 2018.
FACTS
The Taxpayers, a husband and wife, moved to Virginia in September 2018. The wife was employed by a company based in ***** (“State A”) but worked remotely from her residence in Virginia. The Taxpayers filed a part-year Virginia resident income tax return and a State A nonresident/part-year resident income tax return for the 2018 taxable year. On their Virginia return, the Taxpayers claimed a credit for income tax paid to State A. The Department denied the credit and issued an assessment. The Taxpayers appealed, contending they were permitted to claim a credit for income tax paid to State A because the wife’s employer was based there.
DETERMINATION
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. 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 in 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 credit is also subject to the further limitation that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax. See Virginia Code § 58.1-332 A. Thus, a Virginia resident taxpayer may not claim credit on their Virginia income tax return for income tax paid to another state on Virginia source income.
Based on the information provided, it appears that the wife worked remotely from Virginia for an employer based in State A. She reported income attributable to such activities as State A taxable income on her State A nonresident income tax return and claimed credit for tax paid on such income against her Virginia income tax liability. Working remotely from Virginia, regardless of where the employer is based, however, would be considered a business, trade, profession or occupation carried on in Virginia, and, as such, any income from such activities would be considered Virginia source income. See Virginia Code § 58.1-302 and P.D 17-50 (4/6/2017). As Virginia source income, any tax paid to another state on it would not be eligible for the credit under Virginia Code § 58.1-332.
The assessment, therefore, is upheld. The Taxpayers should review State A’s tax laws to determine what extent that income was subject to tax in State A, and if so, whether they may be entitled to claim a credit on their State A return for income tax paid to Virginia. If such income was not taxable by State A, the Taxpayers should file an appropriate refund claim with State A.
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/2193.A