August 31, 2023
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayers”) for the taxable year ended December 31, 2021. I apologize for the delay in responding to your letter.
FACTS
The Taxpayers filed a 2021 part-year Virginia resident individual income tax return, claiming itemized deductions attributable to their period of Virginia residence. The Taxpayers used the federal adjusted gross income (FAGI) attributable to their period of Virginia residence to calculate the 10% of FAGI “floor” below which medical expense deductions may not be claimed. Under review, the Department determined that the entire amount of FAGI should have been used to compute the floor, thereby decreasing their allowable medical expense deduction. As a result, the Taxpayers were issued a reduced refund. The Taxpayers appeal, contending that they should be allowed to use the portion of their FAGI attributable to their period of Virginia residence to compute the medical expense deduction floor.
DETERMINATION
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 Virginia taxable income (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 § 58.1-303 provides, in relevant part:
Any person who, during the taxable year, becomes a resident of Virginia, whether domiciliary or actual, for purposes of income taxation, by moving to the Commonwealth from without during such taxable year, shall be taxable as a resident for only that portion of the taxable year during which he was a resident of the Commonwealth.
Accordingly, VTI for part-year residents is computed by determining income, deductions, subtractions, additions, and modifications attributable to the period of residence in Virginia. Part-year residents may claim a Virginia personal exemption, prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes. Part-year residents who claim itemized federal deductions must claim Virginia itemized deductions that include only those deductions for which the payments that created the deductions were made while the taxpayer was a Virginia resident. See Title 23 of the Virginia Administrative Code (VAC) 10-110-40.
Generally, for both Virginia and federal income tax purposes, the deduction for medical expenses may be claimed only to the extent total medical expenses exceed a floor amount. For the 2021 taxable year, the federal floor was 7.5% of FAGI, while the Virginia floor was 10% of FAGI. As explained in the Virginia Schedule A instructions, the FAGI used in determining the Virginia floor must be adjusted for fixed date conformity (FDC) modifications, if applicable. An adjustment to FAGI is not made for any Virginia additions, subtractions, or deductions other than FDC modifications.
In this case, the Taxpayers elected to itemize deductions on their 2021 federal income tax return. In computing their Virginia itemized deductions, the Taxpayers included expenses that were paid during their period of Virginia residence, including medical expenses paid in Virginia.
No guidance is provided in the statute, regulations, or form instructions regarding the method taxpayers should use for determining the medical expense deduction floor for part-year residents. Absent specific guidance, the Department has determined that taxpayers should use only the FAGI, as adjusted for FDC modifications, attributable to their period of Virginia residence to determine the floor for any medical expenses allowed as a deduction on their part-year Virginia resident income tax return. This amount is currently reported in Part 1, Section A, Line 9, Column 2 of the Virginia Schedule of Income that is submitted with a part-year Virginia resident return.
The case will be returned to the unit that made the adjustment to allow the appropriate medical expense deduction based on this determination. That unit is also directed to correct the FDC modification claimed on the Taxpayers’ Virginia Schedule of Income because the Taxpayers mistakenly adjusted their FAGI for a retirement income subtraction, which is not an FDC modification. That correction will result in an increase in the income attributable to the Taxpayers’ period of residence outside Virginia reported on Line 7 of Form 760PY.
If that unit requires more information, the Taxpayers must provide the information within the time allotted. The Taxpayers will receive an updated schedule of adjustments and will be issued a refund, as warranted. If the Taxpayers disagree with any further adjustments, they may submit an appeal within 90 days pursuant to Virginia Code § 58.1-1821.
The Code of Virginia sections and regulation 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 (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4457.X