January 25, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you protest the individual income tax assessment issued to ***** (the “Taxpayers”) for the 2017 taxable year. I apologize for the delay in responding to your request.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayers failed to include all their income in federal adjusted gross income (FAGI) on their federal return for the 2017 taxable year. Because the Taxpayers had not filed an amended Virginia income tax return to report the federal changes, an assessment was issued for the additional tax due. The Taxpayers appealed, contending that the Department did not explain why their Virginia taxable income (VTI) increased more than their FAGI.
DETERMINATION
Federal Changes
Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of VTI with FAGI. Income properly 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 Chapter 3 of Title 58.1 of the Code of Virginia.
Virginia Code § 58.1-311 requires an individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If a taxpayer fails to file an amended return, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.
In addition, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability. In this case, the information obtain by the Department indicates that the IRS increased the Taxpayers’ FAGI and reduced the Taxpayers’ allowable itemized medical expense deduction for the 2017 taxable year. Accordingly, the Department corrected their Virginia return to reflect the changes.
Age Deduction
Under Virginia Code § 58.1-322.03 5, taxpayers born after January 1, 1939 who have attained the age of 65 may claim a deduction for up to $12,000. However, the amount of this deduction is reduced by $1 for every $1 that adjusted FAGI exceeds $50,000 for single taxpayers or $75,000 for married taxpayers. For the purpose of calculating the deduction, adjusted FAGI means FAGI minus any benefits received under Title II of the Social Security Act and other benefits subject to federal income tax solely under IRC § 86.
In this case, the Taxpayers’ adjusted FAGI exceeded the threshold provided by the statute. As such, for every $1 their FAGI increased, their age deduction was also reduced $1. Thus, because of the manner in which the age deduction is computed, the increase in FAGI effectively caused a double increase in VTI. That is because not only did the increase in FAGI cause a corresponding and equal increase in VTI, the dollar for dollar reduction of the age deduction also increased VTI by the same amount again.
CONCLUSION
In accordance with the information received by the IRS, the Department correctly increased the Taxpayers’ FAGI, reduced their itemized medical expense deduction, and reduced their age deduction for the 2017 taxable year. As such, the 2017 assessment is upheld and remains due and payable.
The Taxpayers will 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 collections actions.
The Code of Virginia sections 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/3478-C