Tax Type
Individual Income Tax
Description
Dependent child with unearned income; Computation of deduction
Topic
Taxable Income
Date Issued
05-13-1987
May 13, 1987
Re: Ruling Request - Individual Income Tax
Dependent Child with Unearned Income
Dear **********************
This is in reply to your letter of March 17, 1987 in which you request that the department clarify the computation of the proper Virginia deduction for dependents with unearned income.
Due to the changes to the federal income tax laws under the Federal Tax Reform Act of 1986, this ruling is applicable only to taxable years beginning before January 1, 1987.
FACTS
For federal income tax purposes (prior to the Federal Tax Reform Act of 1986), individuals who are allowable dependents of another taxpayer are required to itemize deductions if their unearned income exceeds their allowable amount for personal exemptions. There are two exceptions to this requirement of itemizing deductions: (1) When earned income exceeds the applicable zero bracket amount; or (2) When earned income exceeds itemized deductions. Specifically, you are concerned about the Virginia deduction status (standard or itemized) of a dependent child with both earned and unearned income and whose earned income, while it is less than the federal zero bracket amount, is greater than his itemized deductions (Exception 2 above).
In the computation of federal taxable-income, these individuals are required to add to federal adjusted gross income an amount equal to the difference between their earned income and their zero bracket amount. They are not required to attach a federal Schedule A or to utilize any amount of their itemized deductions in this computation.
RULING
Since for federal purposes, these individuals are not required to use their itemized deductions in the computation of federal taxable income and all computations are based upon the relationship between their earned income and the federal zero bracket amount (similar to standard deduction), the department deems that these individuals are not itemizing deductions.
As part of Virginia's conformity to the federal income tax system, Virginia Code §58.1-322 D. requires that a Virginia resident itemize his deductions for Virginia purposes if he elected to itemize deductions for federal income tax purposes. Similarly, if an individual does not itemize deductions for federal purposes, he must use the Virginia standard deduction. Since the department has determined that these individuals are not itemizing deductions, these individuals are required to use the Virginia standard deduction.
Prior to taxable years beginning on and after January 1, 1987, Virginia had no separate statutory authority to require dependents with unearned income to itemize or to limit the amount of their standard deduction. However, Virginia has historically conformed its treatment of these individuals to the federal treatment of such individuals.
Under Virginia Individual Income Tax Regulation Section VR 630-2-322 (D)(3)(c), such an individual may compute his Virginia standard deduction only with respect to earned income. In this case the Virginia standard deduction is limited to 15 percent of earned income, not to exceed $2,000. If 15 percent of earned income does not exceed $l,300 or the amount of earned income, the allowable standard deduction is $l,300 or the amount of earned income, whichever is less.
As I noted earlier, the above Ruling is only applicable to taxable years beginning prior to January 1, 1987. Both federal and Virginia income tax law has been amended effective for taxable years beginning on and after January 1, 1987 to limit the standard deduction allowable to dependents with unearned income.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner