April 17, 2019
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 “Taxpayers”) for the taxable year ended December 31, 2017.
FACTS
The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2017 taxable year, claiming a credit for income tax paid on income earned in South Carolina. Under audit, the Department disallowed the credit because the Taxpayers did not provide a South Carolina tax return. The Taxpayers paid the assessment and filed an appeal, contending they could claim the credit because income tax was withheld in South Carolina and they were not required to file a South Carolina return.
DETERMINATION
Virginia Code § 58.1-332 A allows Virginia residents who are liable for an income tax in another state to claim a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or gain from the sale of a capital asset, derived from sources outside Virginia, and subject to Virginia’s income tax. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited 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 Public Document (P.D.) 97-301 (7/7/1997). The limitation is computed by multiplying the individual’s Virginia tax liability by a fraction, the numerator of which is the income upon which the other state’s tax is imposed, and the denominator of which is Virginia taxable income.
Pursuant to S.C. Code Ann. § 12-6-4910(1)(d), nonresident taxpayers are not required to file a South Carolina income tax return if their South Carolina gross income is less than the personal exemption amount provided under IRC § 151(d). In this case, the Taxpayer’s South Carolina gross income in 2017 was less than the federal personal exemption amount for that year. Because they believed they were not required to file a South Carolina income tax return, the Taxpayers chose to claim a credit on their 2017 Virginia return for the South Carolina income tax withheld.
Like many states, South Carolina provides graduated and progressive tax brackets that are adjusted annually for inflation. See S.C. Code Ann. §§ 12-6-510 and 12-6-520. Based on these brackets, it appears the Taxpayers would not have been liable for South Carolina income tax and could have been eligible for a refund of their entire withholdings.
In order to claim the out-of-state credit, Virginia residents must be both liable for and pay the income tax due to the other state. See Virginia Code § 58.1-332 A. In this case, the Taxpayers did not appear to be liable for South Carolina income tax. Until they can show they were liable for South Carolina income tax, the Taxpayers could not claim the out-of-state credit for income tax withheld by South Carolina on their 2017 Virginia resident income tax return. As such, the Taxpayers’ request for a refund of income tax paid to Virginia for the 2017 taxable year cannot be granted.
The Code of Virginia sections 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 determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner