Document Number
96-127
Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Credit for 401(k) plan distribution
Topic
Credits
Date Issued
06-11-1996
June 11, 1996



Re: § 58.1-1821 Application: Individual Income Tax


Dear*******

This will reply to your letter of September 19, 1995, in which you (the "Taxpayer") protest the denial of an out-of-state tax credit with regards to your Virginia return for taxable year 1993.
FACTS

The Taxpayer was relocated by her employer from New York to Virginia during 1992. During 1993, the Taxpayer took a partial distribution from a qualified retirement plan established by her employer pursuant to Internal Revenue Code ("I.R.C.") § 401 (k). On her 1993 Virginia resident return, she omitted this distribution from her Virginia taxable income. Under New York law, she was required to file a nonresident return and pay tax to that state on this distribution.

The Taxpayer's 1993 Virginia return was subject to an office audit. Because the Code of Virginia does not specifically allow the Taxpayer to omit this income, her return was adjusted and an assessment was issued. The department, citing Code of Virginia § 58.1-332(A), also denied the Taxpayer a credit for income tax paid to another state because this credit is limited to "earned or business" income.

The Taxpayer believes the department erred in denying her a credit. She asks the department to consider her distribution from the deferred compensation plan as earned income, and grant her a credit for the taxes she paid to New York.

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 term earned income is defined by Virginia Regulation ("VR") 630-2-332 as:
    • ...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.

At issue here is whether a distribution from an I.R.C. § 401 (k) plan constitutes earned income, the requirement for being allowed this credit. The department has previously issued a ruling regarding distributions from qualified retirement plans and the credit for income tax paid to another state. See Public Document (P.D.) 86-93 (5/12/86), copy attached .

In P.D.86-93, the department ruled distributions from qualified retirement plans constitute earned income eligible for the credit only to the extent that the distribution represents compensation for services actually rendered. Accordingly, distributions from a plan that represent the withdrawal of contributions made during a period when the employee rendered services for an employer outside of Virginia would qualify as earned income. Nonetheless, distributions in excess of plan contributions represent passive income rather than earned income.

In the instant case, the Taxpayer has participated in her employer's plan for several years, and continues to do so. She makes regular contributions to the plan every payroll period. Under this plan, the Taxpayer's employer defers a portion of her wages every payroll period and contributes these monies to the plan.

A review of the 1993 annual statement supplied by the plan to the Taxpayer indicates that her plan contributions exceeded the amount of her distribution on the date of the distribution. Based upon this information, the department finds the distribution received by the Taxpayer constitutes "earned income" for the purposes of the credit granted pursuant to Code of Virginia § 58.1-332(A).

Accordingly, your request for relief is granted. The department has recomputed your 1993 Virginia income tax liability with a credit for income tax paid to New York. Your credit has been computed in accordance with the department's policy regarding tax paid to New York. See P.D. 95-96 (5/1/95), copy attached.

Attached is a schedule showing the computation of the credit, and the remaining assessment outstanding. The remaining assessment should be paid in full within 30 days to avoid accrual of additional interest. Please forward your payment to the Office of Tax Policy, the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1980. Should you have any questions regarding this matter, please contact **** at **** .

Sincerely,




Danny M. Payne
Tax Commissioner


OTP/10825L

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46