February 08, 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, 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia resident income tax return for the 2016 taxable year claiming a deduction for long-term health care premiums and a subtraction for income from a retirement account, the contributions to which were previously taxed by another state. Under review, the Department disallowed the deduction and subtraction and issued an assessment. The Taxpayers paid the assessment and subsequently appealed, contending the information provided supports the deduction and subtraction as claimed.
DETERMINATION
Protective Claim
Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department to file a protective claim for refund within three years of the date of an assessment. A protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided upon its merits pursuant to Virginia Code § 58.1-1821. The Taxpayers satisfied the requirements of filing a protective claim by paying the assessment in full and asserting their rights within the statutory deadline. Because the protective claim does not involve facts or law which depend upon the resolution of a pending case, the Department will consider the claim on the merits pursuant to the administrative appeal procedures.
Conformity
Virginia Code § 58.1-301 provides 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. 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 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.
Long-Term Health Care Premium Deduction
Virginia Code § 58.1-322.03 10 (formerly 58.1-322 D 10) provides a deduction for “[t]he amount an individual pays annually in premiums for long-term health care insurance.” However, “no such deduction . . . shall be allowed if the individual has claimed a federal income tax deduction for such taxable year for long-term health care insurance premiums paid by him.”
In this case, the Taxpayers’ federal Schedule A reported medical expenses that included long-term health care premiums. The Taxpayers, however, did not actually deduct any medical expenses because their total medical expenses did not exceed the 10% of FAGI “floor” that applied for the 2016 taxable year. Because the Taxpayers did not get the benefit of a federal income tax deduction for the premiums paid, they were entitled to claim the deduction on their 2016 Virginia return. See Public Document (P.D.) 08-165 (8/29/2008).
Retirement Income Subtraction
Virginia Code § 58.1-322.02 11 provides a subtraction for any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by IRC § 401, an individual retirement account or annuity established under IRC § 408, a deferred compensation plan as defined by IRC § 457, or any federal government retirement program, the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state. Before taxpayers are permitted to subtract any portion of their retirement income, contributions to the retirement plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must still have been subject to income tax in another state.
In P.D. 10-214 (9/15/2010), the Department recognized that Pennsylvania does not allow contributions made by an employee to a retirement plan to be excluded from income. Although the husband may have made contributions to an individual retirement account (IRA) in tax years for which he filed Pennsylvania income tax returns, it appears that his military pay, from which the contributions were made, was entirely excluded from the computation of his Pennsylvania income. Further, there is no indication that the contribution amounts were added back for purposes of computing his Pennsylvania income tax. The only items of income that were reported to Pennsylvania were interest and dividends. As such, the contributions would not have been subject to Pennsylvania income tax and would not qualify for the subtraction. See P.D. 08-140 (7/30/2008).
CONCLUSION
Based on the information provided, the Taxpayers were not eligible to claim a retirement income subtraction. The Taxpayers were, however, eligible to claim a deduction for long-term health care premiums. The Taxpayers’ correspondence indicated that they made an error in their initial premium calculation and that the correct deduction was less than originally claimed. The case will be returned to the audit staff to allow the corrected deduction and to issue a refund as warranted.
The Code of Virginia sections and public documents 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/3480.X