Tax Type
Individual Income Tax
Description
Subtractions from FAGI; Pension funds taxed by another state
Topic
Taxable Income
Date Issued
08-05-1996
August 5, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************
This is in reply to your letter of April 4, 1996, concerning the disallowance of the subtraction claimed on your 1993 Virginia individual income tax return.
FACTS
While a resident of New York, your wife was employed as a guidance counselor for the school system. She made contributions into the New York Teachers' Retirement System (the "System"). The contributions were deductible for federal income tax purposes. The contributions were taxed by the state of New York. Your wife moved to Virginia in 1992 and received distributions from the System in 1993. The distributions were included as income on the federal and Virginia income tax returns. Since the contributions were taxed by the state of New York in previous years, your wife subtracted the distributions on the 1993 Virginia return. The department reviewed the 1993 return, disallowed the subtraction, and issued an assessment. You contend that the same income is being taxed by both Virginia and New York, and as a result, Virginia should allow the subtraction on the income tax return.
DETERMINATION
The starting point for computing Virginia taxable income is federal adjusted gross income. The federal adjusted gross income of a Virginia resident, however, can be modified by the additions, subtractions, deductions, and exemptions specifically indicated in Code of Virginia § 58.1-322 when computing Virginia taxable income.
Although your wife's retirement contributions were taxed by New York in previous years, the distributions from the System were included in the federal adjusted gross income while you were Virginia residents. For the taxable year 1993, Code of Virginia § 58.1-322 does not provide a subtraction for distributions received from a retirement fund that was taxed by another state in a previous year. Such distributions are, therefore, not allowable as a subtraction on the Virginia income tax return when computing Virginia taxable income. As Virginia law is clear on this point, the department properly denied your 1993 subtraction.
Virginia's method of preventing "double taxation" is, typically, to allow an out-of-state tax credit. Code of Virginia § 58.1-332 only provides relief when "earned or business" income is taxed by Virginia and another state in the same taxable year. The 1996 General Assembly has amended the law to provide relief in this type of situation. Effective for taxable years beginning on and after January 1, 1996, House Bill 875 (Chapter 624, 1996 Acts of Assembly) amended Code of Virginia § 58.1-322 to create a subtraction for individuals who received distributions from a retirement plan where the contributions to that retirement plan were taxed in prior years by another state. As a result, individuals who receive such distributions in taxable years beginning on and after January 1, 1996, will benefit from this recent law change.
While I sympathize with your wife's situation, the department lacks the statutory authority to allow the 1993 subtraction, and there is no basis to abate the 1993 assessment. To the extent that your wife receives such distributions in taxable years after 1995, she will benefit from this recent law change. Within thirty days, therefore, please remit your payment of representing********in tax and ********in interest, to the attention of *******Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880 or call him at******if you have further questions.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11090N
Rulings of the Tax Commissioner