Tax Type
Individual Income Tax
Description
Income not eligible for the basic military pay and National Guard compensation subtractions.
Topic
Federal Conformity
Records/Returns/Payments
Subtractions and Exclusions
Date Issued
12-13-2013
December 13, 2013
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This is in response to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2009.
FACTS
The Taxpayers, husband and wife, claimed subtractions from federal adjusted gross income (FAGI) for combat duty pay, Operation Joint Endeavor combat pay, basic military pay, and National Guard compensation on their 2009 Virginia individual income tax return. Under review, the Department disallowed all of the subtractions except the subtraction for combat duty pay and issued an assessment for additional tax and interest.
The Taxpayers filed an appeal. While conceding that they were not eligible for the subtraction for Operation Joint Endeavor combat pay, the Taxpayers contend the husband's military income was eligible for the basic military pay and National Guard compensation subtractions.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
Title 58.1 of the Code of Virginia currently provides three subtractions for military compensation. Military servicemembers may be eligible for a subtraction for: (1) military pay and allowances earned while serving in a combat zone or qualified hazardous duty area (Va. Code § 58.1-322 C 21); (2) military basic pay for personnel on extended active duty for periods in excess of 90 days (Va. Code § 58.1-322 C 23); and (3) wages or salaries received for active and inactive service in the National Guard of the Commonwealth (Va. Code § 58.1-322 C 11). Servicemembers may be eligible for more than one subtraction, but the same income may not be included in more than one subtraction. In other words, a servicemember may not deduct the same income for both the military basic pay subtraction and the National Guard subtraction.
Further, all of the subtractions under Va. Code § 58.1-322 C are prefaced by the words "To the extent included in federal adjusted gross income." As such, no military compensation excluded from FAGI can be used to claim a military subtraction in computing Virginia taxable income. See also Public Document (P.D.) 11-133 (7/25/2011).
Extended Active Duty Pay
Virginia Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of basic military pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the taxpayer exceeds $15,000 and is fully phased out when basic military pay reaches $30,000. The subtraction is available whether the individual is stationed inside or outside of Virginia.
The husband was on extended active duty from March 2008 until March 2009. For the rest of the 2009 taxable year, he returned to a duty status that was not considered to be extended active duty. The husband earned basic military pay throughout the year. A review of the husband's military Form W-2 and leave and earnings statements, however, indicates that only the portion of basic military pay he earned while not on extended active duty was reported as taxable income on the W-2 and included in the Taxpayers' FAGI. The portion earned while on extended active duty was classified as non-taxable combat pay and not included in the Taxpayers' FAGI. As such, none of the husband's basic military pay was eligible for the basic military pay subtraction provided by Va. Code § 58.1-322 C 23.
National Guard Pay
Virginia Code § 58.1-322 C 11 allows a subtraction of wages or salaries received by any person for active and inactive service in the National Guard of the Commonwealth of Virginia. The amount of the subtraction is the lesser of the amount of National Guard income received, not to exceed the amount of income from 39 calendar days of service or $3,000. Further, the National Guard personnel may only claim the subtraction if their rank is captain (O3) or below.
The Department disallowed the National Guard subtraction because it did not appear that the husband was a National Guard member. The husband, however, has provided evidence that he was a lieutenant in the Commonwealth's National Guard in 2009. A portion of the military compensation was included in the Taxpayer's FAGI and not otherwise eligible for any other military pay subtraction. As such, that part of his military income was eligible for the National Guard compensation subtraction.
Combat Duty Pay
During the course of the appeal, questions were raised concerning whether the Taxpayer properly reported a subtraction for combat duty pay. To the extent included in FAGI, Va. Code § 58.1-322 C 21 allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. This subtraction exempts the portion of the officer's combat duty pay or qualified hazardous duty pay included in the FAGI.
A review of the Taxpayers' federal income tax return and W-2 forms indicates that the husband's non-taxable combat duty pay reported on his military W-2 was not included in their FAGI. As indicated above, the combat duty pay consisted of the portion of the husband's basic military pay he earned while on extended active duty. In addition, the information provided indicates that the remainder of the income reported on his military W-2 was not attributable to his time of service in the combat zone or qualified hazardous duty area. As such, none of the husband's military income qualified for the subtraction for combat duty pay under Va. Code § 58.1-322 C 21.
CONCLUSION
Based on the evidence, the Department correctly disallowed the subtraction for basic military pay, and the Taxpayers incorrectly claimed the subtraction for combat duty pay. The Taxpayers, however, were eligible for the subtraction for National Guard compensation to the extent permitted by Va. Code § 58.1-322 C 11.
In accordance with this determination, the audit will be returned to the auditor to make the appropriate adjustments. Upon completion of the revised audit, an updated bill will be sent to the Taxpayers. The Taxpayers should remit payment of the revised assessment within 30 days to avoid the accrual of additional interest. Please send the requested payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5405754104.M
Rulings of the Tax Commissioner