Tax Type
Individual Income Tax
Description
Federal gross adjusted income; Credits; Taxes paid by residents to other states; Out-of-state unemployment benefits
Topic
Taxable Income
Date Issued
07-31-1995
July 31, 1995
Re: §58.1-1821 Application: Individual Income Tax
Dear*****************
This will reply to your letter of May 31, 1994, in which you and your spouse (the "Taxpayers") protest the denial of an out-of-state tax credit with regards to your Virginia return for taxable year 1991.
FACTS
The Taxpayers were Virginia residents during all of 1991. The Taxpayers received unemployment compensation benefits from their former state of residence during 1991, and claimed a subtraction for these benefits in determining their 1991 Virginia taxable income. The Taxpayers' 1991 Virginia return was subject to an office audit. Because the Code of Virginia does not specifically allow the subtraction claimed by the Taxpayers, their return was adjusted and an assessment was issued. The department, citing Code of Virginia §58.1-332(A), also denied the Taxpayers a credit for income tax paid to another state because this credit is limited to "earned or business" income.
You believe the department erred in denying this credit and you ask the department to reconsider the status of unemployment compensation benefits for the purposes of the credit provided by Code of Virginia §58.1-332(A).
DETERMINATION
Code of Virginia §58.1-332(A) provides a credit when a Virginia resident becomes liable to another state for income tax on any earned or business income derived from sources outside of Virginia. The statute does not provide a credit for all tax paid to another state, rather it limits the credit to tax paid on "earned or business" income from sources outside of Virginia. The term earned income is defined by Virginia Regulation ("VR") 630-2-332 as:
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- ...wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered...Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.
As a result of the federal Tax Reform Act of 1986 (the " 1986 Act"), unemployment compensation benefits became fully taxable for federal income tax purposes. For years prior to the effective date of the 1986 Act, federal law provided a limited exclusion from gross income for these benefits. Because Virginia's individual income tax computation conforms to federal law, this change also affected the taxability of these benefits for Virginia income tax purposes.
An excerpt from the House Ways and Means Committee Report for the 1986 Act explained the law change with respect to unemployment compensation benefits in the following manner:
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- "The committee believes that unemployment compensation benefits, which essentially are wage replacement payments, should be treated for tax purposes in the same manner as wages or other wage-type payments".
- "The committee believes that unemployment compensation benefits, which essentially are wage replacement payments, should be treated for tax purposes in the same manner as wages or other wage-type payments".
Accordingly, your request for relief is granted. Attached you will find a schedule showing your 1991 Virginia income tax liability recomputed with a credit for income tax paid to another state. In addition, the department has recomputed your tax liability using a more advantageous filing status. Married, filing separately on a combined return allows a married couple to reduce their tax liability when both spouses have income. A review of your account shows you previously paid your 1991 assessment in full. Therefore, the department will be issuing you a refund with interest in the near future. Should you have any questions regarding this matter, please contact*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8216L
Rulings of the Tax Commissioner