Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Filers of combined state return and joint out-of-state return
Topic
Credits
Date Issued
08-21-1996
August 21, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear**********
This will reply to your letter of July 25,1996, in which you and your wife (the "Taxpayers") protest the reduction of a credit for income tax paid to another state on your 1991, 1992, and 1994 individual income tax returns.
FACTS
The Taxpayers were Virginia residents during 1991, 1992, and 1994. The husband derived business income from sources outside of Virginia during these years. The Taxpayers filed Virginia resident returns denoted as married filing separately on a combined form (i.e. filing status 4) and claimed an out-of-state tax credit for taxes paid to Georgia and New York on the aforementioned income.
Although the husband was the sole recipient of the business income, the Taxpayers filed joint nonresident returns for Georgia and New York and computed the nonresident taxable income using the joint personal exemptions and deductions. When filing the combined Virginia return, the out-of-state tax credit was computed using the husband's taxable income alone.
The Taxpayers' returns were subject to an office audit by the department. The out-of--state tax credits were recomputed using the joint taxable income which resulted in reduced credits. Consequently, assessments were issued. The Taxpayers contend the credits should be computed solely on the husband's taxable income.
DETERMINATION
Code of Virginia § 58.1-332(A), allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. The amount of the credit is limited to the lesser of the income tax paid to the other state or the Virginia income tax attributable to such 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.
The department has previously issued rulings addressing the proper method for computing the credit limitation in these circumstances. See Public Documents ("P.D.") 95-261 (10/16/95), and 94-105 (4/08/94), copies enclosed.
The computation of the credit is based on the other state's nonresident return taken as a whole, which includes the filing status, exemptions, and deductions claimed. When a joint nonresident return is filed by taxpayers where only one spouse has income from the other state, the taxpayers benefit from claiming the joint exemptions and deductions. The result is a lower nonresident taxable income on which tax is assessed. In such instances, the policy of the department has been to compute the out-of-state tax credit based on the joint Virginia tax liabilities of the spouses.
The department believes this 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 and the Virginia combined filing status.
A further review of your 1994 return shows the credit for taxes paid to New York was also adjusted. Because the New York nonresident return requires the taxpayer to compute the New York taxable income tax as if the nonresident were in fact a resident, a special adjustment is required when computing the allowable out-of-state tax credit. The method used to compute the reduced credit corresponds with department policy. See P.D. 95-96 (5/01/95), copy enclosed.
Consequently, your request for relief must be denied. In reviewing your application, however, my staff has determined that for tax years 1991 and 1994 the credit was not computed in accordance with the policy stated herewith. I have directed my staff to properly adjust the credit as shown on the attached schedules. A review of your account shows the 1991, 1992 and 1994 assessments have been previously satisfied. Refunds resulting from the adjusted credit computation will be issued accordingly. Should you have additional questions regarding this matter, please contact ******* at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11473M
Rulings of the Tax Commissioner