March 30, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
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.
FACTS
The Taxpayers, a husband and wife, filed their 2017 Virginia income tax return claiming a deduction for the carryover of contributions made to five Virginia 529 college savings accounts. Under review, the Department increased the amount of federal adjusted gross income (FAGI) the Taxpayers reported on their Virginia return to match the FAGI reported on their federal return. The Department also denied the deduction for the carryover of contributions made to the 529 accounts on the basis that the Taxpayers had utilized all of their contribution carryovers prior to the 2017 taxable year. The Taxpayers paid the resulting assessment and filed an appeal, contending that the documentation provided shows that there were enough contribution carryovers to claim the deduction.
DETERMINATION
Virginia Code § 58.1-322.03 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract or account, the remainder may be carried forward and deducted in future taxable years. The deduction was limited to $2,000 per prepaid tuition contract or savings trust account prior to the 2009 taxable year.
Pursuant to Virginia Code § 58.1-322.03 7 b, a purchaser of a prepaid tuition contract or savings trust account who has attained age 70 is allowed to deduct the full amount paid for the contract or account, less any amounts previously deducted.
The Taxpayers purchased five Virginia prepaid tuition contracts with the husband named as the owner of three contracts and the wife as the owner of two. The Taxpayers’ documentation shows that contributions were made to two contracts for each year from 2005 through 2013. It shows that one contribution was made to a third prepaid contract in 2010. The documentation further shows that contributions were made in 2016 to two other contracts. Some of the deductions the Taxpayers took in previous taxable years exceeded the maximum allowable for that year. By the time the Taxpayers filed the 2017 return at issue, they had cumulatively taken deductions that exceeded their total contributions. The audit staff denied the deduction the Taxpayers took on their 2017 return on this basis.
In Public Document (P.D.) 10-240 (10/1/2010), the Department ruled that taxpayers may only claim a prepaid contract deduction for a contribution made for a particular taxable year in that year and any carryover must be claimed in successive years. In other words, taxpayers must fully claim the deduction in the years in which they are eligible to claim the deduction. The only way for a taxpayer to claim a deduction they did not take but could have for a previous year is to file an amended Virginia income tax return within the three year limitations period provided by Virginia Code § 58.1-1823.
Just as taxpayers must claim the maximum allowable deduction for a respective taxable year and are prohibited by the Department’s policy set forth in P.D. 10-240 from carrying over amounts they could have taken as a deduction in prior years but did not, the Department must be held to a similar standard as to the timing of its adjustments. In this case, the Department had the opportunity to correct the Taxpayer’s overstated deductions in prior taxable years that are now beyond the statute of limitations. For the period at issue, the Department is limited to adjusting the deduction to the maximum allowed had the Taxpayers correctly claimed deductions in prior taxable years.
To assist with analyzing this appeal, the audit staff supplied a schedule showing what the Taxpayers’ allowable deduction for the 2017 taxable year would be if the Taxpayers had previously claimed the proper deduction amounts. This amount corresponds to the amount claimed by the Taxpayers on their 2017 return. Accordingly, the assessment will be abated and a refund issued as warranted.
Based on information provided, the Taxpayers’ deductions for subsequent taxable years are limited to the amounts computed on this schedule, copy attached. As such, the Taxpayers are advised to review the deductions claimed in subsequent years and file amended returns, if necessary, to correct their college savings account deductions.
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 contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3786.B