Tax Type
Individual Income Tax
Description
Tax paid by residents to other states; Credit
Topic
Credits
Date Issued
05-12-1986
May 12, 1986
Re: Request for Ruling/Individual Income Tax
This will reply to your letter of January 8, 1986, in which you submit a request for a ruling on the applicability of the credit for income derived from sources outside of Virginia.
Your client will be retiring and relocating to Virginia in 1986. Subsequent to his move here, your client expects to receive from sources outside Virginia the following types of income: severance pay, supplemental income, bonuses, payment in lieu of stock option plan, payments from qualified pension and profit sharing plans, and proceeds from the sale of real estate. In the Event that any or all such income is taxed by another state, you request a ruling on the applicability to your client of the Virginia tax credit for income taxes paid to other states.
Section 58.1-332.A of the Code of Virginia provides that "[w]henever a resident of the Commonwealth has become liable for income tax to another state, on earned or business income...derived from sources without the Commonwealth and subject to taxation under this chapter, the amount of income tax payable by him shall...be credited on his return with the income tax so paid by him to such other state."
The above statue does not provide a credit for all tax paid to another state, but as noted in section 630-2-332 of the Virginia Individual Income Tax Regulations, the credit applies only to tax paid on "earned or business income" is not defined by Virginia statue, but the terms are defined, for purposes of the credit, in Regulation Section 630-2-332.
As defined by regulation,"earned income" means:
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- wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered, but does not include that part of compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.
- wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered, but does not include that part of compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.
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- income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed, for example, sole proprietorship, provide that if such business incurred a loss such loss would be allowable under federal law. Thus income from hobbies and other activities not engaged in primarily for profit is not business income even though a Schedule C, E, or F may be filed for such activities.
- income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed, for example, sole proprietorship, provide that if such business incurred a loss such loss would be allowable under federal law. Thus income from hobbies and other activities not engaged in primarily for profit is not business income even though a Schedule C, E, or F may be filed for such activities.
Severance Pay
To the extent that severance pay represents compensation for services actually rendered, such pay constitutes earned income eligible for the credit. For example, severance pay based on a percentage of the salary earned during employment constitutes earned income. However, severance pay that merely represents consideration for the cancellation of an employment contract or that represents an amount received for refraining from rendering personal services or engaging in a competitive activity does not constitute earned income for purposes of the credit.
Supplemental Income
It is my understanding that the term "supplemental income" in this case refers to payments from nonqualified deferred compensation plans. Contributions to such plans are not deductible for federal and Virginia tax purposes as are contributions to qualified plans; therefore, the taxable portion of benefits paid by such income is passive in nature, a credit is not available for income tax paid to another state.
Bonuses
As a bonus typically represents compensation for services actually performed, it is generally considered to be earned income eligible for the credit. For example, a bonus paid by an employer to an employee for a period during which the employee performed personal services for the employer in another state constitutes earned income for purposes of the credit. However, a bonus that does not represent compensation for services actually performed would not be earned income for purposes of the credit.
Payments in Lieu of Stock From a Stock Option Plan
Ordinarily the disposition of stock acquired through an employee stock option plan will create a capital gain. Such gains are specifically excluded from the Regulation Section 630-2-332 definition of earned income. However, to the extent related to services performed, cash payments to an employee in lieu of his participation in a stock option plan represent earned income.
In addition, I understand that your client may receive stock in lieu of compensation. In such an event, stock provided as compensation for services rendered qualifies as earned income.
Payments from Qualified Pension and Profit Sharing Plans
Payments from qualified pension and profit sharing plans constitute earned income eligible for the credit only to the extent that the payments represent compensation for services actually rendered. For example, payments from a plan that represent the withdrawal of employer contributions made during a period when the employee rendered services for his employer outside of Virginia would qualify as earned income. However, payments in excess of contributions represent passive income rather than earned income.
Proceeds from the Sale of Real Estate
Proceeds from the sale of real estate by your client do not represent compensation for services rendered, thus such proceeds do not constitute earned income. Such proceeds may constitute business income for purposes of the credit, but only if the real estate is held in the course of a business activity requiring the filling of a federal schedule C, E, or F. Tax paid on proceeds from the sale of a residence would not qualify for the credit.
If you have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner