May 18, 2021
Re: § 58.1-1821 Application: Individual Income Tax
This will reply to your letter in which you seek correction of the assessment of individual income tax issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2017.
The Taxpayers, a husband and wife, filed a 2017 part-year resident Virginia income tax return, subtracting income they claimed was attributable to their period of residence outside Virginia. Under audit, the Department determined that a portion of such income was wage income earned by the wife during her period of Virginia residency. Accordingly, the Department reduced the subtraction in and issued an assessment. The Taxpayers appeal, contending the wife was exempt from Virginia income tax because she was a nonresident alien.
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 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 Virginia Code § 58.1-322.01 through § 58.1-322.04.
Virginia Code § 58.1-303 provides in relevant part as follows:
Any person who, during the taxable year, becomes a resident of Virginia, whether domiciliary or actual, for purposes of income taxation, by moving to the Commonwealth from without during such taxable year, shall be taxable as a resident for only that portion of the taxable year during which he was a resident of the Commonwealth . . . .
Accordingly, Virginia taxable income for part-year residents is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.
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. 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.
In this case, information included with their federal income tax return indicates that the Taxpayers began residing in Virginia in June 2017. The Taxpayers also indicated on a questionnaire submitted to the audit staff that they resided 199 days in Virginia in 2017. Accordingly, at a minimum, the Taxpayers were taxable as part-year residents on an actual residency basis because they spent more than 183 days in Virginia in 2017. See Virginia Code § 58.1-302.
The Taxpayers represent that the wife was a nonresident alien who earned wages in 2017 under an F visa. The Taxpayers cite to information published on-line by the IRS concerning the taxation of resident and nonresident aliens, Topic No. 851, which explains that “exempt individuals” include students temporarily in the United States under an F visa. The Taxpayers argue that because the wife was “exempt” from being considered a resident alien for federal income tax purposes, she could not be liable for the income tax imposed by the Commonwealth on its residents.
Nonresident aliens engaged in trade or business within the United States during the taxable year are subject to federal income tax at the graduated rates provided under IRC § 1 on taxable income effectively connected with the conduct of a trade or business. See IRC § 871(b)(1). In determining taxable income for such purpose, gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. See IRC § 871(b)(2). Nonresident aliens who are temporarily present under certain types of visas, including an F visa, are treated as nonresident aliens engaged in trade or business within the United States, and certain kinds of income they receive, including wage income, are treated as effectively connected with the conduct of a trade or business within the United States. See IRC § 871(c).
IRC § 61(a) defines gross income as income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” Wages are reported to the IRS on Form W-2 and are generally considered income to the recipient for federal income tax purposes. See Treas. Reg. 1.61-2(a)(1). Thus, wages that are, by definition, included in FAGI are also included in the computation of VTI.
The information provided indicates the wife’s wages from employment were included in FAGI on her federal income tax return. As explained above, the wife was considered a Virginia resident for at least the period of her part-year residency, and any wages earned during such period would have been includable in VTI. Further, the Taxpayers indicated that she worked for her employer in Virginia. Thus, even if she had not been a resident of Virginia, she would have been liable for Virginia income tax on such wages as income from Virginia sources, unless she met the filing exception described in Virginia Code § 58.1-321. See Virginia Code § 58.1-325.
The Taxpayers believe the wife’s status as a nonresident alien for federal income tax purposes means that she could not be subject to Virginia income tax as a Virginia resident. An individual’s residency status for Virginia income tax purposes is determined by Virginia law. A taxpayer’s status as a resident or nonresident alien, as the case may be, for federal income tax purposes has no bearing on the determination whether an individual is subject to Virginia income tax as a Virginia resident. See also Public Document (P.D.) 16-11 (2/29/2016).
As part-year Virginia residents as defined by Virginia law, the Taxpayers were liable for income tax on that portion of their income attributable to their period of Virginia residency. In addition, the wife’s status as a nonresident alien for federal income tax purposes had no bearing on whether or not her income was taxable by Virginia. Accordingly, the assessment is upheld. A revised bill will be issued 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 and possible collections actions.
The Taxpayers indicate that the assessment will create a financial hardship. If the assessment creates a financial hardship, the Taxpayers may pursue an offer in compromise based on doubtful collectability. To begin that process, the Taxpayers should complete the enclosed Individual Offer in Compromise: Doubtful Collectibility form and Financial Statement for Individuals, and include the required fee or fee waiver request. The completed forms and statement will allow the Department to review and analyze the Taxpayers’ financial situation. Upon completion of that review, a response will be issued to the Taxpayers. The Taxpayers also have the option to request a payment agreement with the Department’s Collections Unit. The Collections Unit may be contacted at (804) 367-8045.
The Code of Virginia sections 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 call ***** at *****.
Craig M. Burns