March 22, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayers”) for the taxable years ended December 31, 2016 through 2018.
FACTS
The Taxpayers, a husband and wife, filed Virginia part-year resident individual income tax returns for the taxable years at issue. On their 2016 and 2018 part-year returns, the Taxpayers claimed credit for tax paid to ***** (Country A) on retirement income. Under review, the Department determined that the Taxpayers should have filed full-year resident returns for each of the 2016 through 2018 taxable years on the basis that they had remained domiciliary residents of Virginia. In addition, the credits for tax paid to Country A on retirement income was disallowed as to the 2016 and 2018 taxable years on the basis that the Taxpayers had failed to provide sufficient documentation to prove the tax was paid to Country A. As a result, assessments were issued.
Subsequently, the Taxpayers filed amended 2017 and 2018 Virginia resident income tax returns. The Taxpayers conceded that they should have filed as full-year residents of Virginia, but they again claimed credit for income tax paid to Country A on retirement income. The Department denied the credit claimed on the amended 2017 return and re-issued an assessment. The Department did not deny the credit claimed on the 2018 amended return. The 2018 assessment was adjusted according to the amended return, but a balance remained due. The Taxpayers have paid this balance. The Taxpayers filed an appeal, contending that they were eligible to claim the credit for income tax paid to Country A on retirement income for each of the taxable years at issue.
DETERMINATION
2018 Taxable Year
The Department’s records indicate that the Taxpayers’ amended 2018 Virginia return was timely filed and that the assessment for the 2018 taxable year has been paid. Because the Taxpayers do not dispute that they should have filed a 2018 Virginia return as full-year residents and because the Department did not deny the credit for that taxable year, the Taxpayers have not “set forth the grounds upon which” relief could be considered. See Virginia Code § 58.1-1821.
Foreign Source Retirement Income Credit
Virginia Code § 58.1-301 provides, with certain exceptions, that 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 Virginia taxable income with federal adjusted gross income (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 § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in FAGI, derived from past employment in the foreign country and subject to Virginia income tax. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and a foreign country on these types of income during the same taxable year.
The Taxpayers filed their 2016 and 2017 federal and Virginia returns reporting pension income as part of FAGI. The Department requested copies of tax returns from Country A to show the actual amount of income tax paid to Country A. The Taxpayers provided copies of Country A information returns showing the amount of income tax paid from the pension’s income. They also provided an explanation from a Country A tax professional concerning how such income is taxed under Country A’s tax laws. The explanation also included a schedule showing the computation of Country A tax due on the pension income. Virginia Code § 58.1-332.1 only requires that taxpayers provide proof that they paid the tax to the foreign country. In this instance, the information returns and explanations provided constitute such proof. Accordingly, the Taxpayers were permitted to claim the credit for income tax paid to Country A for the 2016 and 2017 taxable years.
CONCLUSION
The Department did not deny the credit for the 2018 taxable year, and the Taxpayers have paid the balance due on the 2018 assessment, as it was adjusted based on their amended return. Therefore, no further action is required as to the 2018 taxable year. The case, however, will be returned to the unit that made the adjustments in order to reinstate the credit as to the 2016 and 2017 tax years. With their appeal, the Taxpayers have provided a schedule showing the computation of the credit for the 2016 taxable year on a full-year residency basis. A credit for the full year was already claimed on the 2017 amended return the Taxpayers previously filed.
That unit may review the Taxpayers’ computation of the credits if it wishes, but if any adjustment is made to the amount originally claimed, the adjustment must be fully explained and communicated to the Taxpayers in writing. If the Taxpayers’ liability is adjusted, they will have 90 days from the date of being notified of such adjustment within which to appeal, if they believe the adjustment was erroneous. Once the credits are reinstated, the assessments will be adjusted as warranted and revised bills will be issued if a balance remains due or refunds issued if an overpayment results. In addition, the reviewing unit is instructed to provide an accounting of the 2016 and 2017 taxable year accounts to the Taxpayers, detailing any remaining balances due or refunds to be issued.
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
AR/3701.B