Tax Type
Individual Income Tax
Description
Taxable income; In general; Minor's unearned income included in parents' income
Topic
Taxable Income
Date Issued
08-25-1997
August 25, 1997
Re: Request for Ruling: Individual income tax
Dear********************
This will reply to your letter ot July 28, 1997, in which you request a ruling on the treatment of interest on obligations of the United States received by a child that is reported on the income tax return of the parent.
FACTS
A parent elects to report the unearned income of a child on the parent's federal tax return pursuant to Internal Revenue Code (IRC) 1(9)(7). A portion of the child's income includes interest on obligations of the United States. The federal adjusted gross income of the parent, for federal and Virginia purposes, would include the child's income. At issue in this ruling is the treatment of the child's income reported on the parents return when a portion of the child's income is attributable to interest from obligations of the United States.
RULING
ln a Virginia Tax Bulletin 92-11, dated December 1, 1992, copy enclosed, the department published its position on the treatment of a child's income that is included on the parent's return. The department also addressed this issue in Public Document (P.D.) 95-84, copy enclosed. The department's longstanding policy is that any portion of a child's income that is included in the federal adjusted gross income of the parent is subject to Virginia taxation on the parent's return.
Code of Virginia § 58.1-322(C)(1), copy enclosed, provides that, to the extent included in federal adjusted gross income, there will be subtracted:
-
- Income derived from obligations, or on the sale or exchange of obligations, of the United States and on obligations or securities of any authority, commission or instrumentality of the United States to the extent exempt state income taxes under the laws of the United States including, but not limited to, stocks, bonds, treasury bills, and treasury notes, but not including interest on refunds of federal taxes, interest on equipment purchase contracts, or interest on other normal business transactions.
As a result, interest from obligations of the United States that is included in federal adjusted gross income may be subtracted on the Virginia return when calculating Virginia taxable income.
In instances where a child's income includes items that are both taxable and exempt for Virginia income tax purposes, the amount of the child's exempt income that remains included in the parent's federal adjusted gross income must be determined. This should be accomplished by prorating the child's income included in the parent's federal adjusted gross income by the ratio of the child's interest on obligations of the United States to the child's income subject to federal tax. The resulting amount, which is the portion of the parent's federal adjusted gross income attributable the child's interest on obligations of the United States, may be subtracted on the Virginia return of the parent pursuant to Code of Virginia § 58.1-322(C)(1).
For example, in 1996, a Parent (P) has wages of $50,000. The Child (C) has dividend income of $2,400 and interest income on obligations of the United States of $600, totaling $3,000. For federal tax purposes, if P elects to report C's income on his federal tax return, C's income of $3,000 would be reduced by the $650 standard deduction and $650 to be taxed at C's tax rate. The balance of $1,700 would be added to the wages of $50,000, and the resulting federal adjusted gross income would be $51,700 to the parent. The prorated portion of the $1,700 attributable to the interest income on obligations of the United States would be calculated as shown below:
$600 (interest from U.S. obligations)
X $1,700 (C's income on P's return) = $340
$3,000 (C's income subject to federal tax)
In this example, therefore, the prorated portion of the child's income attributable to interest on obligations of the United States would be $340. This amount may be allowed as a subtraction to modify federal adjusted gross income on the parent's Virginia tax return.
I trust that this is an adequate response to your request. If further assistance is needed, please contact ***** at************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12804N
Rulings of the Tax Commissioner