Tax Type
Individual Income Tax
Description
The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy.
Topic
Federal Conformity
Subtractions and Exclusions
Date Issued
02-28-2014
February 28, 2014
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable year ending December 31, 2012.
FACTS
The Taxpayer claimed a subtraction on her 2012 individual income tax return for an annuity death benefit resulting from income received after the death of her husband. Under review, the Department disallowed the subtraction and issued an assessment for additional tax and interest. The Taxpayer paid the assessment and filed an appeal, contending that the tax preparation software used to complete the tax return automatically claimed the subtraction.
DETERMINATION
Death Benefit Subtraction
Virginia Code § 58.1-301 provides that the 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 the federal adjusted gross income (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.
Under IRC § 101 (as amended in 2006), life insurance benefit payments paid by reason of the death of the insured are exempt from federal taxation, and thus exempt from Virginia taxation. IRC § 72 (as amended in 2013), however, provides that a portion of the death benefits from an annuity, including life insurance contracts, are taxable. Because death benefits were treated dissimilarly for income tax purposes, the General Assembly sought to provide relief to individuals who are unable to obtain standard life insurance. As a result, the death benefits subtraction for certain annuity contract payments was enacted. See Public Document (P.D.) 13-149 (7/31/2013).
Pursuant to Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that is received by a beneficiary of such contract and is subject to federal income taxation." In order to qualify for the subtraction, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See P.D. 09-36 (3/31/2009) and P.D. 10-63 (5/7/2010). In 2012, the General Assembly enacted legislation to clarify the intent of the law regarding the subtraction of annuity death benefits by amending Va. Code § 58.1-322 C 32 to codify the Department's policy implemented in P.D. 09-36. See Chapter 305, Acts of Assembly.
Tax Preparation Software
The Taxpayer contends that the tax software used to prepare her return automatically computed the subtraction. She indicates that she also reported death benefit payments on her 2010 and 2011 tax returns while using the same software, but no subtraction was allowed.
Tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See P.D. 13-50 (4/24/2013).
CONCLUSION
Based on this determination, the assessment for the 2012 taxable year is upheld. Because the Taxpayer has satisfied the assessment, no further action is required.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please 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/1-5534219352.B
Rulings of the Tax Commissioner