February 16, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear ****:
This will respond to your letter in which you seek correction of the individual income tax assessment issued to your clients, ***** (the “Taxpayers”), for the taxable year ended December 31, 2019.
FACTS
The Taxpayers, a husband and a wife, filed a Virginia resident income tax return for the 2019 taxable year. Under review, the Department denied the credit the Taxpayers claimed for income tax paid to California. The Taxpayers appealed, contending the husband was as an actual resident of California and was thus eligible to claim the credit.
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 or gain from the sale of a capital asset. Further, this code section states:
The credit . . . shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by . . . this section.
As a general rule, Virginia law does not allow a resident to claim a credit on her Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on her California nonresident return. (Similarly, a California resident would claim the credit for tax paid to California on her Virginia nonresident return.)
At issue here is which state should allow the out-of-state credit if a taxpayer possesses dual residency. The Department has previously issued a ruling that is relevant to the case at hand. See Public Document (P.D.) 94-355 (11/23/94). In this ruling, the Department determined that when a reciprocity state does not allow a credit on a nonresident return, the taxpayer would claim the credit on their individual Virginia returns.
In the instant case, California law would not permit the Taxpayers to claim a credit for taxes the Taxpayers paid to Virginia if the husband was an actual resident of California. Conversely, Virginia law would not prohibit the credit. The credit, therefore, would be allowed on the Taxpayers’ Virginia return provided the husband was in fact, an actual resident of California. See P.D. 20-46 (3/18/2020).
The Taxpayers should be aware, however, that 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 the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See P.D. 97-301 (7/7/1997). The limitation is computed by multiplying the individual’s Virginia tax liability by a fraction, the numerator of which is the income upon which the other state’s tax is imposed, and the denominator of which is Virginia taxable income. If the husband was an actual resident of California and a domiciliary resident of Virginia, the Taxpayers would be allowed a credit against their Virginia income tax liability for income tax paid to California to the extent permitted by Virginia Code § 58.1-332.
In this case, the Department denied the credit but did not provide a reason when it notified the Taxpayers of their return adjustment. It does not appear, therefore, that the unit making the adjustment considered that the husband may have been an actual resident of California. The case, therefore, will be returned to the unit that made the adjustment for a re-evaluation. That unit must evaluate the Taxpayer’s assertions by requesting relevant documentation such as, for example, a California resident income tax return. The Taxpayer must work further with that unit by providing any documentation requested. Once the documentation is submitted, the unit making the request will review it and adjust the Taxpayer’s Virginia return to the extent warranted. Any action taken by that unit, whether it be to allow the credit in whole or in part or to deny the credit, must be adequately explained to the Taxpayers in writing. Should the Taxpayers wish to appeal the outcome of that review, they will have 90 days from the date of such written communication in which to file an appeal.
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/3535.M