March 8, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable year ended December 31, 2019.
FACTS
The Taxpayer filed a Virginia part-year resident individual income tax return for the 2019 taxable year. She was employed by the United States Department of State and was assigned to a post in *****(State B) beginning in June 2019 and leased a residence in Virginia at that time. The Taxpayer filed a resident ***** (State A) income tax return for the 2019 taxable year. She also filed a part-year Virginia return attributing the income earned while living in the Commonwealth as Virginia income and claimed an out-of-state credit for the tax paid to State A on the Virginia return.
Under audit, the Department determined that the Taxpayer was an actual resident of Virginia. Accordingly, the Department adjusted the return to reflect a full year of Virginia residency and issued an assessment. The Taxpayer paid the assessment and appealed, contending she was a resident of State A and was entitled to claim the out-of-state credit.
DETERMINATION
Foreign Service Agents
In Public Document (P.D.) 91-70 (4/15/1991), the Department ruled that Foreign Service employees may retain their original state of domicile even while assigned to a temporary post. The Department acknowledges that most assignments from the Department of State are generally temporary in nature and the determination of one's domicile can only be made after considering all of the facts and circumstances. See, e.g., P.D. 16-66 (5/2/2016). In this case, the assessment was not based on a finding by the Department that the Taxpayer had abandoned her State A domicile and established domicile in Virginia. Rather, the Department’s reviewer concluded that the Taxpayer should be taxable as an actual resident for the entire taxable year.
Part-Year Residency
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 Chapter 3 of Title 58.1 of the Code of Virginia.
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.
The Department’s reviewer concluded that the Taxpayer should be taxable as a full year resident because she spent more than 183 days in Virginia in 2019. It appears that the Taxpayer did not begin living in Virginia until June 2019 and that she was living in State A prior to that. Accordingly, even though she spent more than 183 days in Virginia in 2019, Virginia Code § 58.1-303 limits the time during which should would be considered a resident to the time she was a resident subsequent to her move into the Commonwealth, i.e., her resident period beginning in June 2019. She would not have been subject to Virginia income tax as a Virginia resident prior to that move-in date.
Out-of-State Tax Credit
Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income.
As a general rule, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. 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. See P.D. 97-301 (7/7/1997).
Notwithstanding the provisions of Virginia Code § 58.1-332, Virginia Code § 58.1-303 prohibits part-year residents from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. See P.D. 13-28 (3/5/2013). A taxpayer, therefore, cannot claim credit for income tax paid to State A on any income she received while she was solely a resident of State A in 2019. In this case, however, the Taxpayer remained a domiciliary resident of State A even though she resided in Virginia for a portion of the year. Under such conditions, the Taxpayer would be able to claim credit for tax paid to State A on income received during the period she was both a domiciliary resident of State A and a part-year actual resident of Virginia, provided the income was not from Virginia sources. The documentation provided indicates the Taxpayer’s workplace was in State B while she was residing in Virginia. Therefore, any income attributable to such employment appears to have been derived from sources outside the Commonwealth.
CONCLUSION
The case will be returned back to the auditor to adjust the Taxpayer’s 2019 Virginia return to reflect only that income earned while she was a Virginia resident and to grant the out-of-state credit to the extent allowable under Virginia law. Once the adjustments are made, a refund will be issued as warranted. The Department may review the computation of the out-of-state credit the Taxpayer claimed and if any adjustments are made, they must be communicated to the Taxpayer in writing. The Taxpayer would then have the opportunity to appeal within 90 days if she disagrees.
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/3793.B