Nonresident Credit - California
November 14, 2024
Re: § 58.1-1821 Application: Individual Income Tax
Dear ***** and *****:
This will respond to your letter in which you seek correction of an assessment of individual income tax issued to ***** & ***** (the “Taxpayers”) for the taxable year ended December 31, 2022.
FACTS
The Taxpayers, a husband and wife, filed a part-year Virginia resident income tax return for the 2022 taxable year claiming a credit for income tax paid to three other states. A portion of the credit claimed on their Virginia return was attributable to income tax paid to ***** (State A), a state where the Taxpayers also filed a 2022 part-year resident return. The remaining credit was attributable to tax paid to ***** and ***** (State B) as reported on nonresident returns. Under review, the Department denied the credit and issued an assessment. The Taxpayers filed an application for correction contending that disallowing the credit resulted in double taxation.
DETERMINATION
Part-Year Residency
Virginia Code § 58.1-303 provides that any individual who becomes a resident of another state 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 attribute their income between their periods of residence in and outside of Virginia on a schedule of income filed with their return (Form 760PY).
The Taxpayers moved from State A to Virginia in August 2022. Consistent with this move, the Taxpayers filed a Virginia part-year resident income tax return, properly reporting the income received after their residency start date as Virginia taxable income.
Credit for Taxes Paid to another State
Generally
Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations when they are taxed by both Virginia and another state on these types of income.
In most circumstances, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. The limitation is computed by multiplying the individual’s Virginia tax liability by a fraction, the numerator of which is the income upon which the other state’s tax is imposed, and the denominator of which is Virginia taxable income. See Public Document (P.D.) 97-301 (7/7/1997).
Part-year Residency
Notwithstanding the provisions of Virginia Code § 58.1-332, part-year residents are prohibited 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 Virginia Code § 58.1-303 and P.D. 13-28 (3/5/2013).
State A
As a result of this part-year residency rule, the Taxpayers could not claim credit for income tax paid to State A on any income they received while they were solely residents of State A in 2022. The Taxpayers, however, would have been able to claim credit for tax paid to State A on income received during the period they were residents of Virginia, provided the income was from State A sources. See P.D. 18-36 (3/26/2018).
The information provided indicates that the husband received a performance bonus during his period of Virginia residence, most of which his employer sourced to other states. The husband’s employer sourced a significant portion of this bonus to State A. When the Taxpayers filed their part-year State A return, they reported all of the income received while residents of State A, in addition to that portion of the bonus the husband’s employer sourced to State A.
In accordance with the Department’s policy, the Taxpayers were eligible to claim a credit for tax paid to State A on the portion of the bonus sourced to State A because they also properly reported all of the bonus income as taxable income received during their period of Virginia residence. Based on the information provided, it appears that the Taxpayers claimed credit for only that portion of tax paid on State A source income they received during their period of Virginia residency.
State B
Consistent with the employer’s sourcing of the performance bonus, the Taxpayers filed a nonresident return in State B to report the amount of income his employer attributed to State B. Because this income was also reported as taxable on their Virginia return, the Taxpayers were eligible to claim the credit for tax paid to State B.
California
Virginia law generally does not allow a resident to claim a credit on their Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on the California nonresident return. See Virginia Code § 58.1-332 B. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return. As such, the Taxpayers were not eligible to claim a credit for tax paid to California on their Virginia return.
CONCLUSION
For the reasons discussed above, the assessment will be adjusted to reinstate the credit claimed by the Taxpayers for tax paid to State A and State B. The credit for tax paid to California cannot be granted.
After the assessment has been adjusted, 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 and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at 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) ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia