January 25, 2022
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 “Taxpayers”) for the taxable year ended December 31, 2017.
FACTS
The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2017 taxable year claiming a credit for income tax paid on pension income earned by the husband in ***** (Country A). Under audit, the Department disallowed the credit because the Taxpayers had not filed a Country A income tax return to prove the tax was paid. The Taxpayers paid the assessment and filed an appeal, contending that they were not required to file a Country A return.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, that 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 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 Chapter 3 of Title 58.1 of the Code of Virginia.
Virginia Code § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in FAGI, derived from past employment in the foreign country and subject to Virginia income tax. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and a foreign country on these types of income during the same taxable year.
The Taxpayers filed 2017 federal and Virginia returns reporting the husband’s pension income as part of FAGI. They provided copies of Country A information returns to the Department showing the amount of income tax withheld from the husband’s pension. The Department’s auditor requested a tax return from Country A to show the actual amount of income tax paid to Country A. The Taxpayers contend that they were not required to file a Country A return and assert that the amount of tax withheld from the husband’s pension represents their Country A income tax liability.
Generally, nonresidents of Country A may elect, but are not required to file a Country A income tax return unless they owe tax, want to claim a refund, or in certain specific scenarios which are not applicable to the current Taxpayers. The Taxpayers have provided documentation showing that Country A income tax was withheld from the husband’s pension income for the taxable year at issue and that such income was included in FAGI. Because they did not file a return to claim a refund, or pay any additional tax due, the amount withheld by Country A properly represents the amount of their tax liability. Further, Virginia Code § 58.1-332.1 only requires that taxpayers provide proof that they paid to the tax to the foreign country. In this instance, the information returns provided constitute such proof. Accordingly, the Taxpayers are permitted to claim the credit for income tax paid to Country A for the 2017 taxable year.
The case, will be returned to the unit that made the adjustment in order to reinstate the credit. That unit may review the Taxpayers’ 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 Taxpayers in writing. If the credit is adjusted, the Taxpayers will have 90 days from the date of being notified of such adjustment within which to appeal, if they believe 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 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/3856.B