March 23, 2021
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 “Taxpayer”) for the taxable year ended December 31, 2017.
FACTS
The Taxpayer filed a Virginia resident individual income tax return and claimed a tax credit for income tax paid to Maryland. Under audit, the Taxpayer provided a copy of her Maryland nonresident return indicating that her employer withheld Maryland income tax and that a refund of the tax was requested. Because Virginia has a reciprocal agreement with Maryland, and the Taxpayer was a Virginia resident, the credit was denied and an assessment was issued. The Taxpayer filed an appeal contending she was not liable for the additional tax because she was entitled to claim an out-of-state credit for income tax paid to Maryland.
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 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.
In this instance, the Taxpayer filed a nonresident income tax return and reported income she earned in Maryland to Maryland. Under the Reciprocal Income Tax Agreement between Commonwealth of Virginia and State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only. If Virginia residents have Maryland income tax withheld from wages earned while commuting to work in Maryland, they should file income tax returns with Maryland in order to receive a refund.
The Taxpayer provided a copy of her Maryland return with the appeal. The copy provided indicates she requested a refund from Maryland in accordance with the reciprocal agreement.
Out-of-State Tax Credit
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid to another state provided the income is either earned or business income or gain on the sale of a capital asset. 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 Public Document (P.D.) 97-301 (7/7/1997).
The Taxpayer contends she should be allowed a tax credit on her Virginia return, because income tax was paid to Maryland. Because her Maryland return indicates no income tax liability, she did not actually pay tax to another state. Further, under Virginia law, an individual may be eligible for the credit for income tax paid to another state only when the reciprocal agreement does not apply.
CONCLUSION
Because the Taxpayer was not a resident of Maryland in 2017, and her income from the Maryland employer consisted only of wages, the Taxpayer was exempt from income taxation by Maryland under the reciprocal agreement. In addition, she was not eligible to claim a credit for income tax paid to Maryland on her Virginia income tax return.
Accordingly, the assessment for the 2017 taxable year is upheld. An updated bill will be issued shortly. The Taxpayer should remit payment for the outstanding balance within 30 days of the bill date to avoid any collection actions.
The Code of Virginia sections, reciprocal agreement and public document 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/3626.B