Tax Type
Individual Income Tax
Description
Lump-sum distributions qualifying for special averaging provisions under federal tax law
Topic
Taxable Income
Date Issued
08-19-1987
August 19, 1987
Re: Ruling Request / Lump Sum Distributions
Individual Income Tax
Dear ********************
This is in reply to your letter of March 19, 1987 in which you request information concerning the Virginia income tax treatment of lump sum distributions qualifying for the special averaging provisions under federal income tax law. Specifically you are concerned with any changes to Virginia law in response to the changes under the federal Tax Reform Act of 1986.
The Virginia response to changes made to the treatment of qualifying lump sum distributions under the federal Tax Reform Act of 1986 was contained in the Virginia Technical Corrections Bill (Senate Bill 554). The Virginia changes contained in that bill were not substantive; they were only intended to maintain the current Virginia treatment of qualifying lump sum distributions.
The Federal Tax Reform Act of 1986 amended the federal provisions relating to lump sum distributions to allow 5 year averaging of qualifying distributions, instead of 10 year averaging. However, there is a transitional provision that still allows 10 averaging to certain individuals. It was necessary to change the references under Virginia law to include 5-year averaging. Also because the Federal Tax Reform Act of 1986 repealed the special treatment of capital gains, it was necessary to eliminate the reference to capital gains in the Virginia law as it related to 10 year averaging of lump sum distributions.
Our law requires individuals that elect averaging of a qualifying lump sum distribution (whether 5 year or 10 year) add to federal adjusted gross income the amount of income that would have been included in federal adjusted gross income if averaging had not been elected, less the amount of the federal minimum distribution allowance and any other amount excludable for federal income tax purposes.
The transitional provision that allows certain individuals to still use 10 year averaging, also allows these individuals the option of figuring the tax on the capital gain portion of the distribution at special rates. Individuals who qualify for 10 year averaging under the transitional provisions and also elect to pay the tax on the capital gain portion using the special tax computation, rather than including it in ordinary income, will be taxed for Virginia purposes as if all of the income was treated as ordinary income under 10 year averaging.
I hope that this answers your questions. If you have any further questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner