05-108 | Virginia Tax

Tax Type

Individual Income Tax

Description

Estimated payments; refunds and adjustments: out-of-state tax credit

Topic

Computation of Tax

Records/Returns/Payments

Date Issued

07-08-2005

July 8, 2005

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the taxable years 2000 through 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, are domiciliary residents of ***** ("State A") who received income from Virginia sources. The Taxpayers timely filed a Virginia Nonresident Individual Income Tax Return for taxable year 2000 and claimed a credit for taxes paid to State A. The Taxpayers requested that the resulting overpayment be credited toward their 2001 estimated tax liability.

In 2003, the Department disallowed the credit for tax paid to another state claimed on the 2000 income tax return, resulting in issuance of an assessment. An assessment for the estimated tax underpayment penalty was also issued. In addition, the overpayment reported on the 2000 return was not credited toward the Taxpayers' 2001 estimated tax liability.

Because of the amount of overpayment claimed on the original 2000 income tax return, the Taxpayers' original returns for 2001 and 2002 also reported overpayments that were credited toward the subsequent year's estimated tax. As a result of the disallowance of the out-of-state tax credit on the 2000 return, the Department made adjustments to the 2001, 2002, and 2003 income tax returns to reduce the amount of estimated payments claimed on the original returns.

The Taxpayers assert that (1) the estimated tax underpayment penalty assessment for the 2000 taxable year is incorrect, and (2) the Department improperly denied credit on the 2000 income tax return for income tax paid to State A. The Taxpayers request that the 2000, 2001, 2002 and 2003 income tax returns be corrected, and the amount seized from their 2002 overpayment be refunded, with interest.

DETERMINATION

Credit for Income Tax Paid to State A

Virginia Code § 58.1-332 establishes the Virginia out-of-state tax credit and provides that:

- Whenever a nonresident individual of this Commonwealth has become liable to the state where he resides for income tax upon his Virginia taxable income for the taxable year, derived from Virginia sources and subject to taxation under this chapter, the amount of such tax payable under this chapter shall be credited with such proportion of the tax so payable by him to the state where he resides . . . .The credit, however, shall be allowed only if the laws of such state: (i) grant a substantially similar credit to residents of Virginia subject to income tax under such laws ....

In the case at hand, State A does not provide a reciprocal credit on its nonresident income tax return for income tax paid by a Virginia resident on income earned in State A. Therefore, the credit allowed under Va. Code § 58.1-332 B is not available to the Taxpayers, and the Department was correct to deny the credit for the 2000 taxable year.

Underpayment of Estimated Tax

Virginia Code § 58.1-492 provides a penalty in the event of an underpayment of estimated tax. Taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. If the estimated tax payments are not sufficient to cover the income tax liability reported on the annual tax return, a taxpayer may be assessed the estimated underpayment penalty unless one of the following estimated underpayment exceptions are met:

1. The total payments of estimated tax equal or exceed the tax computed, at the rates applicable to the taxable year, on the basis of the facts shown on the return for, and the law applicable to, the preceding taxable year.

2. The total payments of estimated tax equal or exceed 90% of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. The total payments of estimated tax equal or exceed 90% of the tax on the annualized taxable income for the taxable year.

A review of the information provided shows that the estimated tax payments on the 2000 income tax return satisfied exception 1, enumerated above. As such, the assessment for the 2000 taxable year will be adjusted to remove the estimated tax underpayment penalty.

2001 Taxable Year

The Taxpayers timely filed a Virginia Nonresident Individual Income Tax Return for taxable year 2001. A review of the tax return shows that the estimated tax reported on the return resulted from a credit for the overpayment claimed on the Taxpayers' 2000 income tax return. The Department's disallowance of the out-of-state tax credit on the 2000 income tax return eliminated the overpayment. Accordingly, the Taxpayers had no credit to estimated income tax for the 2001 taxable year. As a result, the Taxpayers 2001 overpayment claimed on their 2001 return was eliminated, leaving no amount to be credited toward 2002 estimated tax. Based on the evidence, the assessment for the 2001 taxable year is correct.

2002 Taxable Year

For the 2002 taxable year, the Taxpayers timely filed their nonresident individual income tax return. The Department reduced the estimated payments claimed on the return based on adjustments to the 2001 return, as explained above. The Taxpayers had income tax withholding that exceeded their 2002 income tax liability. A portion of the reduced overpayment was withheld in payment of the 2000 and 2001 assessments. The balance of the overpayment was refunded to the Taxpayers instead of being credited toward the 2003 estimated tax liability.

2003 Taxable Year

The Taxpayers 2003 income tax return was timely filed and included a credit to estimated tax carried forward from 2002. Because the balance of the 2002 overpayment was refunded to the Taxpayers, the Department correctly reduced the amount of the estimated payments claimed for 2003. As such, the assessment for the 2003 taxable year is correct.

2004 Taxable Year

The Taxpayers had requested that the overpayment from the 2003 tax return be credited toward their estimated tax for taxable year 2004. Because of adjustments made by the Department, the credit toward taxable year 2004 estimated tax has been eliminated. Accordingly, the Taxpayers may not claim the 2003 overpayment reported on their original return as an estimated payment for 2004.

CONCLUSION

Based on the foregoing, the Department cannot accept the Taxpayers' income tax returns as filed for the taxable years at issue. The assessment for the 2000 taxable year has been adjusted in accordance with this determination. The enclosed schedule shows the revised balance. Because the assessment has been paid, a refund, including an appropriate amount of refund interest, will be issued shortly.

The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/51463E

Rulings of the Tax Commissioner