September 14, 2021
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond 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, 2017.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia resident income tax return for the 2017 taxable year and claimed a combat pay subtraction. Under audit, the Department disallowed the subtraction and issued an assessment. The Taxpayers appealed, contending that they do not agree with the Department’s adjustments.
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 for 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 (VTI) with federal adjusted gross income (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 Chapter 3 of Title 58.1 of the Code of Virginia.
To the extent included in FAGI, Virginia Code § 58.1-322.02 13 (formerly Virginia Code § 58.1-322 C 21) allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. The Taxpayers assert that they were eligible to claim the subtraction because the husband earned income while deployed with the United States military in 2017. However, the W-2 forms provided by the Taxpayers show that the combat zone pay earned by the husband was not included in their FAGI. Allowing taxpayers to subtract income that is already not included in FAGI, and hence the computation of VTI, would effectively allow taxpayers to deduct the same income twice.
Accordingly, the Department was correct in disallowing the combat pay subtraction. The Taxpayers should be aware that no change was made to the basic pay subtraction they claimed, which fully accounted for the part of the husband’s military pay that was included in FAGI. Therefore, the assessment for the 2017 taxable year is upheld and remains due and payable. The Taxpayers will receive an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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/3754-C