December 28, 2021
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond 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, 2016. I apologize for the delay in responding to your request.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers may have been required to file a Virginia income tax return for the 2016 taxable year. Because no return was on file and the Taxpayers did not respond to an information request, the Department issued an assessment based on the best information available. The Taxpayers called the Department to dispute the assessment and resulting collection action. Based on the information provided by the Taxpayers, the Department requested that the Taxpayers file a Virginia nonresident return reporting their income from a Virginia pass-through entity (VA PTE).
The Taxpayers submitted a Virginia nonresident return, reporting a 0% nonresident allocation percentage. The Department abated the existing non-filer assessment, adjusted the Taxpayers’ nonresident allocation percentage to 100%, and issued a new assessment. The Department subsequently determined that a portion of the income was retirement income not from Virginia sources and adjusted the nonresident allocation percentage to 77.9%. The Taxpayers appealed, alleging that they already paid taxes to ***** (State A), and they only should be taxable, if at all, for the last few weeks of 2016, when they moved back to Virginia. Consistent with this assertion, the Taxpayers submitted a Virginia part-year resident return with their appeal.
DETERMINATION
Part-Year Residency
Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of Virginia during the taxable year is subject to taxation for the period in which they were a Virginia resident. Accordingly, Virginia Taxable Income (VTI) is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia.
However, a part-year resident who, as a nonresident of Virginia for any portion of the taxable year, derived income from Virginia sources is also subject to tax as a nonresident and is not eligible for a credit for taxes paid to another state pursuant to Virginia Code § 58.1-332. See Virginia Code § 58.1-303 C.
The Taxpayers’ part-year Virginia return reported that part of their wage and pension income was attributable to their period of Virginia residency. The Taxpayers also claimed the credit for low income individuals under Virginia Code § 58.1-339.8. In computing the credit, it appears that the Taxpayer excluded from the computation that part of their income that was attributable to their period of residence outside Virginia. A part-year resident’s income earned outside their period of Virginia residency, however, is still included in their federal adjusted gross income (FAGI), and Virginia Code § 58.1-339.8 does not allow a deduction for such income for purposes of computing the credit for low income individuals. See Public Document (P.D.) 18-219 (12/28/2018). After factoring such income into the computation, the Taxpayers were not eligible to claim the credit.
Nonresident Income
The income subject to Virginia income tax of a nonresident is computed by multiplying their VTI (computed as if they were a resident) by the ratio of their net income, gain, loss, and deductions from Virginia sources to their net income, gain, loss, and deductions from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss, and deductions attributable to (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery and gambling winnings from wagers placed or paid at a location in Virginia.
The audit staff initially adjusted the Taxpayers’ nonresident return to reflect a nonresident allocation percentage of 100% and issued a new assessment. Subsequently, the audit staff determined that certain retirement income reported on a Form 1099-R was not Virginia source income, the nonresident allocation percentage was reduced to 77.9%, and the assessment was revised accordingly. While the appeal was pending, the audit staff further determined that certain of the Taxpayers’ wages were not Virginia source income and that the nonresident allocation percentage should be reduced to 42.7%. The remaining allocation reflects the sourcing of certain income from VA PTE, which the Taxpayers do not dispute.
CONCLUSION
The Taxpayers failed to file a nonresident return that included their income from Virginia sources during their period of residency outside of Virginia. The Taxpayers properly filed a part-year return for their period of Virginia residency, but were not eligible to claim the credit for low-income taxpayers. The case will be returned to the audit staff to adjust the assessment further in accordance with their findings as to the source of the Taxpayers’ wage income. The part-year return must also be adjusted to eliminate the credit for low income taxpayers.
The Taxpayers will then receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest and possible collection action. The Taxpayers may also be eligible for a credit for taxes paid to Virginia on their State A return, but they would need to determine their eligibility in accordance with State A law and file an amended State A return if they are still within the statute of limitations to do so.
The Code of Virginia sections and public document cited are available online 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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3443-C