Tax Type
Individual Income Tax
Description
Subtractions;Inapplicability to Return of Capital
Topic
Taxpayers
Date Issued
04-04-1985
April 4, 1985
Dear *****
This will reply to your letter concerning the tax treatment of distributions from an individual retirement account holding tax-exempt obligations. You present three situations.
First, you assume that an IRA account is invested solely in U.S. Government obligations from 1983 through 1989, during which it collects $***** in interest. In 1990 the account reinvests entirely in common stocks and collects $**** in dividends from 1990 through 1994. A distribution of $**** is made in 1995 to the owner of the account.
Because, as it appears from the facts, 2/3 of the investment income is from interest on obligations of the United States, the taxpayer who is regarded as being true owner of the underlying investments would be entitled to subtract from his federal adjusted gross income for 1995 2/3 of the $**** distribution (or $*****), but not the remaining 1/3 (or $****).
Second, you assume the same facts as above except that the distribution is a "premature withdrawal.' For federal income tax purposes such premature distribution must be included in the taxpayer's gross income and an additional federal tax would be imposed as well.
As above, the "true owner' taxpayer would be entitled to subtract $***** from his federal adjusted gross income for 1995.
Finally, you ask whether a portion of a distribution from an IRA would be exempt from Virginia income tax if the portion represented (a) interest from investments in Virginia municipal obligations or (b) dividends deemed to be a return of capital.
The starting point for Virginia taxable income of a Virginia resident is his federal adjusted gross income for the taxable year, with the modifications specified in Virginia Code Sec. 58.1-322. Section 58.1-322 C. 2, requires a subtraction, to the extent included in federal adjusted gross income, of interest on obligations of Virginia or of any of its political subdivisions or instrumentalities. Accordingly, a "true owner' taxpayer could subtract from his federal adjusted gross income (to the extent included therein) that portion of the distribution he could substantiate was exempt.
There is no Section 58.1-322 modification for dividends deemed to be return of capital. Thus, whatever portion of a dividend distribution deemed to be a return of capital was excluded under federal law from federal adjusted gross income would already be excluded from Virginia taxable income. If no federal exclusion applied, the dividend distribution would be subject to Virginia taxable income.
Dear *****
This will reply to your letter concerning the tax treatment of distributions from an individual retirement account holding tax-exempt obligations. You present three situations.
First, you assume that an IRA account is invested solely in U.S. Government obligations from 1983 through 1989, during which it collects $***** in interest. In 1990 the account reinvests entirely in common stocks and collects $**** in dividends from 1990 through 1994. A distribution of $**** is made in 1995 to the owner of the account.
Because, as it appears from the facts, 2/3 of the investment income is from interest on obligations of the United States, the taxpayer who is regarded as being true owner of the underlying investments would be entitled to subtract from his federal adjusted gross income for 1995 2/3 of the $**** distribution (or $*****), but not the remaining 1/3 (or $****).
Second, you assume the same facts as above except that the distribution is a "premature withdrawal.' For federal income tax purposes such premature distribution must be included in the taxpayer's gross income and an additional federal tax would be imposed as well.
As above, the "true owner' taxpayer would be entitled to subtract $***** from his federal adjusted gross income for 1995.
Finally, you ask whether a portion of a distribution from an IRA would be exempt from Virginia income tax if the portion represented (a) interest from investments in Virginia municipal obligations or (b) dividends deemed to be a return of capital.
The starting point for Virginia taxable income of a Virginia resident is his federal adjusted gross income for the taxable year, with the modifications specified in Virginia Code Sec. 58.1-322. Section 58.1-322 C. 2, requires a subtraction, to the extent included in federal adjusted gross income, of interest on obligations of Virginia or of any of its political subdivisions or instrumentalities. Accordingly, a "true owner' taxpayer could subtract from his federal adjusted gross income (to the extent included therein) that portion of the distribution he could substantiate was exempt.
There is no Section 58.1-322 modification for dividends deemed to be return of capital. Thus, whatever portion of a dividend distribution deemed to be a return of capital was excluded under federal law from federal adjusted gross income would already be excluded from Virginia taxable income. If no federal exclusion applied, the dividend distribution would be subject to Virginia taxable income.
Rulings of the Tax Commissioner