May 14, 2025
Re: Ruling Request: Individual Income Tax
Dear *****:
This will respond to your letter in which you (the “Taxpayer”) request a ruling as to what extent your pension distributions qualify for Virginia’s retirement income subtraction.
FACTS
The Taxpayer was employed by the ****** (State A) and made contributions to its employee pension plan. He is now a Virginia resident and has begun receiving annuity payments from the pension plan. The Taxpayer requests a ruling regarding whether he can subtract any portion of his annuity payments in computing his Virginia taxable income, and, if so, what method he should use to determine the subtraction.
RULING
Virginia Code § 58.1-301 provides, with certain exceptions, 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. 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 § 58.1-322.02 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 have been subject to income tax in another state.
In Public Document (P.D.) 10-214 (9/15/2010), the Department established a basis recovery method to determine what part of a distribution from a retirement account with changing account values, such as individual retirement accounts or accounts established under IRC § 401(k) or § 403(b), qualifies for the subtraction. Using this method, a taxpayer would determine the subtraction by multiplying the total amount of the annual distribution(s) by a ratio equal to the total balance of previously taxed contributions divided by the sum of the value of the retirement account at the end of the taxable year plus the total amount of the annual distribution(s).
The Department has also ruled that the simplified method described under IRC § 72(d)(1)(B) must be used to determine what part of a determinable periodic payment from a traditional pension plan qualifies for the subtraction. See P.D. 15-104 (5/12/2015). Under this method, the investment in the contract as of the annuity starting date (the total contributions previously taxed) is divided by a designated number of anticipated monthly payments to determine what portion of the monthly payment qualifies for the subtraction. Assuming annuity payments are made monthly, such amount would be multiplied by the number of months an annuitant receives payments during the taxable year to determine the total subtraction for that year.
Based on the information provided, the Taxpayer made contributions to a pension plan that were deductible for federal income tax purposes and subject to income tax in State A. The Taxpayer has begun receiving distributions from the pension plan in equal monthly payments. As such, the Taxpayer qualifies for the retirement income subtraction, and he should use the simplified method to determine what part of the distributions is subtractable.
An amortization schedule is enclosed which indicates the allowable subtraction per year until the Taxpayer has fully recovered the previously taxed contributions, at which time the distributions become taxable in full. The Taxpayer should review his 2023 Virginia individual income tax return to confirm that he correctly calculated the subtraction, which should be reported as an “other” subtraction on Virginia Schedule ADJ using Code 31. If the claimed subtraction was incorrect, he should file an amended return.
This ruling is based on the facts provided by the Taxpayer and summarized above. Any change in facts or the introduction of new facts may lead to a different result.
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 ruling, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
Enclosure
AR/4859.Q