Rulings of the Tax Commissioner

October 5, 2023

Re:    § 58.1-1821 Application: 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, 2020. 

FACTS

The Taxpayers, a husband and wife, filed a part-year Virginia resident income tax return for the 2020 taxable year claiming both a credit for taxes paid to Maryland and a subtraction for income attributable to their period of Maryland residency. Under review, the Department denied the credit and removed the amount of income the Taxpayers attributed to their period of residence outside of Virginia. Because their Maryland return showed that they requested a refund of all Maryland income taxes withheld, the auditor concluded the Taxpayers should not have allocated any income to Maryland. The Taxpayers appeal, contending that the Department’s adjustments effectively treated them as residents of Virginia for the entire 2020 taxable year when they were only part-year residents.

DETERMINATION

Part-Year Residency

Virginia Code § 58.1-303 provides that any individual who becomes a resident of Virginia during a taxable year shall be taxable as a Virginia resident for only that portion of the taxable year during which that person was a resident of the Commonwealth. Title 23 of the Virginia Administrative Code (VAC) 10-110-40 further explains that the Virginia taxable income of a part-year resident shall be computed by determining income, deductions, subtractions, additions, and modifications attributable to the period of residence in Virginia. As such, any individual who is a part-year resident of Virginia during a taxable year must apportion their income between their periods of residence in and outside of Virginia on a schedule of income filed with their return (Form 760PY). 

As stated above, the Taxpayers filed a part-year Virginia resident income tax return for the 2020 taxable year. The schedule of income filed with their return allocated their income between their periods of Maryland and Virginia residency. Under review, the Department adjusted the amount of income the Taxpayers attributed to their period of residence outside of Virginia to zero, on the basis that they had not allocated any income to Maryland on their Maryland income tax return. 

The Forms W-2 filed by the Taxpayers, however, allocated their income between Maryland and Virginia for state tax withholding purposes. This supports the Taxpayers’ assertion that they were part-year Virginia residents, and received income attributable to their period of Maryland residency. 

Even if an individual reports that no income was allocable to another state on that state’s part year tax return, the Department cannot rely solely on that other state’s return as the basis for adjusting the income allocation reported on their Virginia part-year income tax return. The individual may have actually correctly reported their income on the other states return based on its laws and filing requirements. In this case, the Taxpayers bear the responsibility of reporting their income properly to Maryland, and if they failed to do so, Maryland likely has the authority to make appropriate adjustments. 

Virginia can only tax income within its limited jurisdiction. The mere fact that income is not reported to another state does not grant the Department authority to assign all the income to Virginia. Instead, the Department must, in the least, seek to attribute income based on factual evidence of residency or income from Virginia sources. 

Out-of-State Tax Credit

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. 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 Taxpayers claimed a credit on their Virginia return for a portion of the Maryland taxes withheld by their employers. Because their Maryland return indicates no income tax liability, they did not actually pay tax to Maryland and thus would not be entitled to a credit.

In addition, notwithstanding the provisions of Virginia Code § 58.1-332, Virginia Code § 58.1-303 prohibits part-year residents from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. See P.D. 13-28 (3/5/2013). The Taxpayers, therefore, cannot claim a credit for income tax paid to Maryland on any income they received while they were solely residents of Maryland. 

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia, and Pennsylvania.

Under the Reciprocal Income Tax Agreement between the Commonwealth of Virginia and the State of Maryland (12/7/2006), Virginia residents commuting into Maryland on a daily basis are permitted to have taxes withheld and paid to Virginia only. If Virginia residents have Maryland income tax withheld from wages earned while commuting to work in Maryland, they should file income tax returns with Maryland in order to receive a refund.

Similarly, Maryland residents commuting into Virginia on a daily basis are permitted to have taxes withheld and paid to Maryland only. The husband indicated that he earned wages in Virginia while a resident of Maryland. Pursuant to the reciprocal agreement, those wages would be taxable only in Maryland. As discussed above, in such case, any Maryland tax paid would not be eligible for a credit in Virginia because the husband was a Maryland resident at the time.

CONCLUSION

The Taxpayers’ 2020 part-year return indicated a Virginia residency start date of April 1, 2020. The lease submitted by the Taxpayers supports their status as part-year residents. The W-2s issued to the Taxpayers allocated income between Virginia and Maryland consistent with the Taxpayers’ part-year residency status. As such, the Department will reinstate the income allocation claimed on the Taxpayers’ original return.

For the reasons discussed above, however, the Taxpayers are not entitled to a credit for taxes paid to another state and the denial of the credit is upheld. 

The Taxpayers should be aware that the Department is not making a determination as to whether they properly reported the timing of their residency change or whether the income attribution between the two states was properly reported on the W-2s. Those issues remain subject to potential audit by the Department within the statute of limitations. 

The assessment will be revised in accordance with this determination. The Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions. 

The Code of Virginia sections, regulation and public documents 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/4240.X