Tax Type
Individual Income Tax
Description
Taxpayer failed to file Virginia income tax returns.
Topic
Domicile
Out of State Tax Credits
Persons Subject to Tax
Records/Returns/Payments
Date Issued
06-10-2014
June 10, 2014
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you appeal the individual income tax assessments issued to ***** (the "Taxpayer") for the taxable years ended December 31, 2006, and 2007. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a domiciliary resident of Virginia, spent more than 183 days in ***** (State A) during 2006 and 2007. The Taxpayer filed State A income tax returns but failed to file Virginia income tax returns. Pursuant to an examination by the Department, assessments were issued for the taxable years at issue. The Taxpayer filed an appeal, contending most of his income was derived from State A's retirement system and should not be subject to tax by Virginia.
DETERMINATION
Retirement Income
It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In People of State of New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained, "the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." See also Mary T. Ryan v. Commonwealth of Virginia, 169 Va. 414, 193 S.E. 534 (1937). Absent any objective evidence to the contrary, Virginia is well within its authority to impose its income tax on all of the income of a Virginia domiciliary resident.
Public Law (P.L.) 104-95, as codified at Title 4 U.S.C.A § 114, however, prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. As such, to the extent it is included in FAGI, retirement income received by an actual or domiciliary resident of Virginia would be included in the computation of Virginia taxable income. In Public Document (P.D.) 02-118 (9/03/2002), the Department determined that, under P.L. 104-95, retirement income received by an actual resident of Virginia was subject to Virginia's income tax even if the retirement income was derived from employment in the other state and the taxpayer remained a domiciliary resident the other state.
In this case, the Taxpayer was an actual resident of State A, but a domiciliary resident of Virginia. Consistent with the determination in P.D. 02-118, Virginia may impose its income tax on all of the Taxpayer's retirement income even though he was actually residing in State A.
Credit for Tax Paid Another State
Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these types of income during the same taxable year.
In P.D.86-93 (5/12/1986), the Department ruled distributions from qualified pension and profit sharing plans constitute earned income eligible for the credit only to the extent that the distribution represents compensation for services actually rendered. As such, distributions from a plan that represent the withdrawal of contributions made during a period when the employee rendered services for an employer outside of Virginia would qualify as earned income. Distributions in excess of plan contributions (i.e., interest, dividends and other types of investment income) are not considered to be earned income.
The credit is limited, however, to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See P.D. 97-301 (7/7/1997) and P.D. 12-105 (6/19/2012). In this case, the Taxpayer was subject to tax as a resident in Virginia. Thus, he may be entitled an out-of-state tax credit for taxes paid to State A. However, because State A does not impose its income tax on pension income, no credit would be available for this income.
CONCLUSION
As a domiciliary resident of Virginia, the Taxpayer was required to file Virginia income tax returns. Because the Taxpayer failed to file and Virginia has the authority to tax a resident's retirement income, the Department was correct in imposing tax on the Taxpayer's pension income received from State A.
The assessments at issue are based on information made available to the Department. The Taxpayer may have additional information that would more accurately reflect his Virginia income. Accordingly, the Taxpayer should file Virginia income tax returns for the 2006 and 2007 taxable years.
The returns should be submitted to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond Virginia 23261-7203, Attention: ***** within 30 days from the date of this letter. If the returns are not filed within the allotted time, the assessments will be considered to be correct and collection action will resume.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this response, 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/1-5241259445.D
Rulings of the Tax Commissioner