March 16, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of an assessment of individual income tax issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2019.
FACTS
The Taxpayer filed a Virginia resident income tax return for the 2019 taxable year, claiming a credit for income tax paid to Maryland. The Department denied the credit and issued an assessment, on the basis that the Taxpayer was not liable to pay income tax to Maryland under the reciprocal income tax agreement between Virginia and Maryland. The Taxpayer appealed, contending that the credit should have been allowed because he lived and worked in Maryland.
DETERMINATION
Residency
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.
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 salaries and wages 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 Maryland, West Virginia, and Pennsylvania.
The reciprocal income tax agreement between Virginia and Maryland was most recently updated in 2006. See Virginia Tax Bulletin (VTB) 06-8 (12/27/2006). The updated agreement makes clear that reciprocity does not apply to a taxpayer who is a domiciliary resident of one state, but who maintains a place of abode and spends an aggregate of more than 183 days of the taxable year in the other state. In this case, the Taxpayer states that he spent 290 nights in Maryland during the 2019 taxable year. He also had a place of abode in Maryland. The Taxpayer, therefore, would have been considered an actual resident of the state of Maryland. The Taxpayer, however, also filed a Virginia resident income tax return. Because he states that he only spent 30 night in Virginia in 2019, he would have been filing a Virginia resident income tax return as a domiciliary resident of Virginia, not as an actual resident. Further information supplied by the Taxpayer supports his status as a domiciliary resident of Virginia. He owned a personal residence in Virginia in which his spouse lived. In addition, he held a Virginia driver’s license and a Virginia voter’s registration. As a so-called “dual resident” of Maryland and Virginia, the reciprocal agreement did not apply. Therefore, the Taxpayer was permitted to claim credit for income tax paid to Maryland to the extent otherwise permitted by Virginia law. See Public Document (P.D.) 18-45 (4/2/2018).
Out-of-State Tax Credit
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, derived from sources outside Virginia, and subject to Virginia’s income tax. 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.
CONCLUSION
Based on the information provided, the Taxpayer was an actual resident of Maryland and a domiciliary resident of Virginia for the 2019 taxable year. As such, the reciprocal agreement between Maryland and Virginia did not apply, and the Taxpayer was permitted to claim a credit for income tax paid to Maryland to the extent allowable under Virginia Code § 58.1-332.
The case, therefore, will be returned to the unit that made the adjustment in order to reinstate the credit. That unit may review the Taxpayer’s computation of the credit if it wishes, but if any adjustment is made to the amount originally claimed, the adjustment must be fully explained and communicated to the Taxpayer in writing. If the credit is adjusted, the Taxpayer will have 90 days from the date of being notified of such adjustment within which to appeal, if he believes the adjustment was erroneous. Once the credit is reinstated, the assessment will be adjusted as warranted, and a refund issued if one is due.
The Code of Virginia sections, public documents and Virginia Tax Bulletin cited are available on-line in the Laws, Rules and 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/3559.M