Rulings of the Tax Commissioner

April 25, 2025

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to ***** and ***** (the “Taxpayers”) for the taxable year ended December 31, 2021.

FACTS

The Taxpayers, a wife and husband, filed a Virginia resident individual income tax return jointly for the 2021 taxable year, claiming a credit for tax paid to the District of Columbia (D.C.). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appeal, contending that they used tax preparation software to complete their return, and the Department should abate the assessment because the credit was claimed unintentionally and was solely attributable to a software error.

DETERMINATION

Taxation of Virginia Residents

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.

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-313 (1937), the United States Supreme Court explained, “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.” As such, even if the wife had no Virginia source income, she would have been subject to Virginia income tax as a Virginia resident.

Credit for Taxes Paid to Another State

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 or gain from the sale of a capital asset. 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 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. 

Nonresidents of D.C. are not generally subject to D.C.’s income tax, although they may be subject to the Unincorporated Business Franchise Tax on income from a trade or business conducted there. See D.C. Code § 47-1806.01. Virginia residents commuting to work in D.C. and earning only salaries and wages are not subject to tax in D.C. on such income and are not required to file a D.C. income tax return. During the taxable year at issue, the Taxpayers resided in Virginia, and the wife commuted to work in D.C. As such, the wife was not subject to income tax in D.C. and, in fact, received a full refund of D.C. tax withheld by her employer.

Tax Preparation Software

The Taxpayers do not dispute that they were not eligible to claim a credit for tax paid to D.C. Rather, they contend that they should not be penalized for the error caused by their tax preparation software. The Department recognizes that tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department, however, is not meant to imply computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department’s processing requirements. The Department provides test case specifications but does not guarantee computational accuracy of the software. See P.D. 13-50 (4/24/2013) and P.D. 22-85 (4/28/2022). In addition, just as the Department has stated with respect to the use of professional tax preparers, a taxpayer’s reliance on tax software to prepare income tax returns does not relieve the taxpayer of the responsibility for ensuring that information reported on the return is accurate. See P.D. 19-69 (6/25/2019) and P.D. 22-17 (1/25/2022).

CONCLUSION

The provisions of Virginia Code § 58.1-332 are clear and do not provide the Department with any discretion to allow the Taxpayers to claim a credit for tax that was not actually paid to another state. Accordingly, although the Department empathizes with the Taxpayer’s situation, the Department’s adjustment was correct, and the Department cannot grant the Taxpayers’ request for an abatement of the resulting tax due.

The Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/5050.Q