Tax Type
Individual Income Tax
Description
Filers of combined state return and joint out-of-state return
Topic
Credits
Date Issued
10-16-1995
October 16, 1995
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************
This will reply to your letter of May 24, 1994, in which you protest the reduction of a credit for income tax paid to Georgia claimed by your clients, **************(the "Taxpayers"), for taxable year 1991 .
FACTS
The husband is a Virginia resident who derives business income from the state of Georgia. The Taxpayers filed a joint Georgia nonresident individual income tax return and claimed a credit on their 1991 Virginia return for income tax paid to that state. For Virginia purposes, the Taxpayers elected to file their return using the combined filing status (commonly referred to as "filing status 4").
The Taxpayers' Virginia return was subject to an office audit by the department and the credit for tax paid to Georgia was adjusted, resulting in an assessment. Because the Taxpayers filed a joint return with Georgia and a combined Virginia return, the department recomputed the credit limitation imposed by Code of Virginia § 58.1-332(A) in a manner different from the Taxpayers' calculation.
You believe the Taxpayers' credit computation on their 1991 Virginia return was correct, and hereby request relief.
DETERMINATION
Code of Virginia § 58.1-332(A) places a limitation on an individual's credit for income tax paid to another state. It describes the computation of this limitation by providing, in pertinent part:
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- The credit allowable under this section shall not exceed such proportion of the income tax otherwise payable by him under this chapter as his income upon which the tax imposed by the other state was computed bears to his Virginia taxable income upon which the tax imposed by this Commonwealth was computed ... (Emphasis added).
The credit provided by Code of Virginia § 58.1-332(A) is limited to the lessor of: (i) the amount of tax actually paid to the other state; or (ii) the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state (the "credit limitation"). The credit limitation is computed by multiplying an individual's Virginia tax liability by a fraction (the Credit limitation percentage"), 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. At issue here is the proper method for computing the credit limitation when a married couple files a combined return for Virginia income tax purposes, but has elected or is required to file a joint return in another state, even though only one spouse has income from that state.
Georgia law allows married nonresident taxpayers the option of filing either a joint or separate return, even though only one nonresident spouse derives income from Georgia sources. The Taxpayers in this case opted to file a joint return. Although the wife had no income taxable by Georgia, the Taxpayers' computation of Georgia taxable income did include both spouses' share of personal exemptions and deductions.
By comparison, when a combined Virginia return is filed, each spouse computes his or her own Virginia taxable income. In computing taxable income, husband and wife may allocate nonbusiness deductions (itemized or standard) in any manner as mutually agree. Also, personal exemptions for dependents may be allocated in the same manner. Virginia's combined filing status, therefore, is in many respects equivalent to its married filing separate status, with the most notable exception being that the combined filing status creates joint and several liability for the tax.
The department has previously issued a ruling addressing the proper method for computing the credit limitation in these circumstances. See P.D. 94-105 (418194), copy attached. In this ruling, the department required married couples to total their separately calculated Virginia taxable incomes computed using the combined status in order to determine the denominator of the credit limitation percentage. The numerator for determining the percentage is the joint taxable on the other state's return as filed. This credit limitation percentage is then applied to the total tax liability of both spouses computed on a combined basis to determine the credit limitation for income tax paid to another state.
In the instant case, the Taxpayers computed the credit limitation by dividing their jointly determined Georgia nonresident taxable income by the husband's separate Virginia taxable income as reported on the combined return. The resulting credit limitation percentage was then applied to the husband's separately determined Virginia tax liability to determine the credit limitation.
The department believes its method conforms to the computation required by Code of Virginia § 58.1-332(A) because it fairly and equitably accounts for the inherent differences between a joint nonresident filing status and Virginia's combined filing status. Therefore, the department finds its method more accurately depicts the credit limitation percentage than does the method used by the Taxpayers.
Accordingly, your application for relief must be denied. A review of your account shows the Taxpayers' 1991 assessment was previously paid in full. Should you have additional questions regarding this matter, please contact **********at****************.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8086L
Rulings of the Tax Commissioner