Rulings of the Tax Commissioner

April 19, 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 a wife, moved from Missouri to Virginia in late June 2017.  For most of the 2017 taxable year, the husband was a partner in a multi-state partnership that operated in Missouri, Virginia and many other states. The Taxpayers filed a joint nonresident Virginia income tax return to report Virginia source income for their period of nonresidency during the 2017 taxable year. They filed a part-year Virginia resident income tax return for the 2017 taxable year, claiming a credit for income tax paid to other states. A portion of the credit claimed on their Virginia return was attributable to income tax paid to Missouri, a state where the Taxpayers filed a 2017 full-year resident return. The remaining credit was attributable to tax paid to numerous other states as reported on nonresident returns filed either individually or on a composite basis. Under review, the Department denied the credit and issued an assessment. The Taxpayers appeal, contending that they properly claimed the credits in accordance with Virginia law.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The credit is also subject to the further limitation that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax. See Virginia Code § 58.1-332 A. Thus, a Virginia resident taxpayer may not claim credit on their Virginia income tax return for income tax paid to another state on Virginia source income. 

Credit For Missouri Taxes 

The Department denied the credit for tax paid to Missouri on the basis that Virginia residents are unable to claim a credit for income tax paid to another state when the laws of the other state provide a credit to such resident individuals substantially similar to the credit granted by Virginia Code § 58.1-332 B. See Virginia Code § 58.1-332 A. The substantially similar credit referred to by the statute is a credit granted to nonresident individuals for income tax paid to their resident state on income sourced to the nonresident state. Such credit is allowed only if the laws of the resident state grant a substantially similar credit to residents of Virginia or impose a tax on the income of its residents derived from Virginia sources and exempt from tax the income of Virginia residents. While a few states such as Arizona, California and Oregon have such “reciprocal” credit provisions, Missouri does not.

Credit For Other States Taxes

The Department’s reviewers’ primary reason for denying the credit for other state taxes was to prevent the Taxpayers from “double-dipping” by claiming the credit for taxes paid to Missouri and other states on their Virginia part-year resident return and for taxes paid to Virginia and other states on their full-year Missouri resident returns. The fact that the Taxpayers claimed credits on both their Virginia and Missouri returns, however, does not necessarily mean that the Taxpayers could not claim them on their Virginia returns. The Department has recently addressed this matter in P.D. 21-32 (3/15/21).

Example

The following illustration builds on the example given in P.D. 21-32 by adding the part-year residency element. Assume that the taxpayer was a full-year State A resident but only a Virginia resident for half of the year and that all states applied a 5% tax rate.  Assume further that income was accrued evenly throughout the year.

In this instance, the Virginia credit for tax paid to State A is calculated as if a nonresident return were filed in State A for the period of Virginia residency. This ensures that the credit for State A taxes is taken only on State A source income accrued during the period of Virginia residency. The final result is that the taxpayer paid $10 to Virginia, $15 to State A, $10 to State B and $15 to State C, for a total of $50 tax paid to all states. This was the same amount of tax that would have been due had all the income simply been subject to tax in Virginia without any credits. This example illustrates, therefore, that “double dipping” of credits in a dual residency scenario with a part-year residency element does not necessarily occur when a taxpayer claims credit for tax paid to one resident state on the other resident state’s return or when the taxpayer claims the same credit for tax paid to nonresident states on both resident returns.  

Part-year Residency

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). The Taxpayers, therefore, cannot claim credit for income tax paid to Missouri on any income they received while they were solely residents of Missouri in 2017. The Taxpayers, however, would be able to claim credit for tax paid to Missouri on income received during the period they were residents of both Missouri and Virginia, provided the income was from Missouri sources. See P.D. 18-36 (3/26/2018) and P.D. 22-40 (3/8/2022).

With their appeal, the Taxpayers have provided a pro forma nonresident return for Missouri to demonstrate that the amount of credit they claimed for Missouri tax paid was attributable solely to Missouri source income accrued during their period of Virginia residency. The Taxpayers have also provided schedules showing the part-year allocations for each state in which they claimed a credit for taxes paid with a nonresident return. This breakdown of income by source is consistent with the instruction the Department gave the dual resident taxpayers in P.D. 16-41 and demonstrates that they have not attempted to claim a credit for income tax paid on any income from Virginia sources or on any income accrued while they were nonresidents of Virginia.  

Missouri Resident Return

The Department’s reviewers also expressed concern that the Taxpayers had a choice in Missouri whether to file a part-year resident return along with a part-year nonresident return or a full-year resident return. They apparently believed that by choosing to file a full-year Missouri resident return the Taxpayers were able to improperly reduce their Virginia tax liability. As demonstrated by the example above, however, no improper reduction of their Virginia tax liability would have occurred just by filing a full-year resident return. Regardless, the Virginia statute allows residents a credit for taxes paid to other states and does not require an examination of the other states’ tax returns except to ensure that a Virginia credit is not taken for taxes paid to such other states on Virginia source income.

CONCLUSION

When taxpayers are dual residents, Virginia Code § 58.1-332 does not prohibit taxpayers from claiming a credit for income tax paid to the other state on their Virginia return.  See P.D. 16-41 (3/31/2016) and P.D. 21-32.  The statute also does not prohibit a taxpayer from claiming a credit for income tax paid to nonresident states on both resident state returns. If a taxpayer was required to pay income tax on a nonresident’s state source income, then in determining whether that tax qualified for a Virginia resident credit under Virginia Code § 58.1-332, whether the taxpayer claimed that credit on another state’s resident return is irrelevant. The credit, however, is subject to certain limitations described in Virginia Code § 58.1-332, including that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax.

The case, therefore, will be returned to the reviewer in order to reinstate the credits consistent with this determination and adjust the assessment accordingly. If a review of the Taxpayers’ specific computations has not already been conducted, the unit may perform such a review and make any adjustments to the credits that the review would warrant. If any such adjustments are made, the basis for them must be clearly communicated to the Taxpayers. At that point, if any balance remains due on the assessment, the Taxpayers will have 90 days from the date a revised bill is issued in which to appeal any further adjustments that were made.

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/3841.X