Rulings of the Tax Commissioner

February 23, 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 “Taxpayer”) for the taxable year ended December 31, 2018.

FACTS

The Taxpayer filed a 2018 Virginia resident individual income tax return, claiming a credit for taxes paid to Pennsylvania on income received for serving as a trustee for a family member’s estate and as a power of attorney (POA) for an incapacitated family member. Under review, the Department denied the credit and issued an assessment. The Department maintained that the credit was not available because of the reciprocity agreement between Pennsylvania and Virginia and because the income at issue was not eligible for the out of state tax credit. The Taxpayer appealed, contending she is eligible to claim the credit. 

DETERMINATION

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn compensation from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Pennsylvania.

Compensation means wages, salaries, commissions and any other form of remuneration paid or accrued to employees for personal services. See Virginia Code § 58.1-302. In this case, the Taxpayer was not an employee and, therefore, did not earn compensation.

Other Income

The federal income tax return includes a line for other income that is taxable but does not generally occur often enough to warrant its own line. The items of income reported on this line include most prizes and awards, gambling winnings, hobby receipts, rent from personal property not used in a trade or business, distributions from health or education savings accounts, taxable portions of disaster relief, recoveries of certain deductions, cancellation of debt, and fees resulting from services performed as a nonprofessional fiduciary. With regard to a nonprofessional fiduciary or personal services representative, fees are reported as other income on the return when received by an individual who is not engaged in a trade or business for the provision of such services. Such services can include acting as an executor of a friend’s or relative’s estate or authority to make decisions for another individual (i.e. Power of Attorney or Medical Power of Attorney).

Out of State Tax Credit

Virginia Code § 58.1-332 A allows Virginia residents, who are liable for an income tax in another state, to claim a credit on their Virginia return. To claim the credit, the income must be either earned or business income or gain from the sale of a capital asset, derived from sources outside Virginia, and subject to Virginia’s income tax. Title 23 of the Virginia Administrative Code (VAC) 10-110-221 defines earned income for purposes of the credit to include wages, salaries, or professional fees and other amounts received for services actually rendered. 

The Department’s auditor concluded that the Taxpayer was not eligible for the credit because the income was reported as “other income” on her federal income tax return. For purposes of the out-of-state tax credit, however, Title 23 VAC 10-110-221 B defines income eligible for the credit. Thus, the manner in which income is reported on a federal income tax return does not govern whether tax on such income can qualify for the credit. Under the regulation, “earned income” includes “other amounts received as compensation for professional services actually rendered.”  In her capacity as trustee and POA, the services provided by the Taxpayer were essentially the same as professional services obtained from a law firm or trust company. 

CONCLUSION

The Taxpayer earned income from professional services conducted outside of Virginia and became liable for income tax to both Virginia and Pennsylvania. As such the Taxpayer was eligible to claim the out of state tax credit, and the assessment at issue will be abated. 

The Code of Virginia sections and regulation 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 ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/2227-C