87-266 | Virginia Tax

Tax Type

Individual Income Tax

Description

Virginia state employee retirement income

Topic

Subtractions and Exclusions

Taxable Income

Date Issued

11-02-1987

November 2, 1987

Re: Ruling Request/Individual Income Tax

Dear **********************

This is in reply to your letter of April 7, 1987 in which you asked several questions regarding the subtraction from federal adjusted gross income applicable to the retirement income received by certain individuals employed or formerly employed by institutions of higher learning within Virginia.

Virginia Code §58.1-322 D.3. provides for the subtraction from federal adjusted gross income for:

- Pensions or retirement income to officers and employees of the Commonwealth, its subdivisions and agencies, or surviving spouses of such officers or employees paid by the Commonwealth or an agency or subdivision thereof. The amount of subtraction allowable for retirement income paid pursuant to a retirement Plan established in accordance with §51-111.28 shall not exceed an amount equal to the amount of retirement benefit received, multiplied by the ratio of contributions made while employed by an institution of higher education located in Virginia to the total contributions made while employed by institutions of higher education everywhere. (Language added by 1986 Acts, Chapter 474.)

Specifically, you have asked the following three questions that relate to the 1986 legislative change and its impact on the taxation of retirement benefits paid pursuant to Virginia Code §51-111.28.

- 1. Does the law apply to a deceased retiree's surviving spouse who has assumed the *********** pension payments that the retiree was receiving?
  
  2. When a faculty member dies in active service, the beneficiary may choose from among the following options: lump sum; payment for a fixed period of years; or lifetime annuity. Does the law apply to the surviving spouse, regardless of the pay-out option? Does the law apply if the beneficiary is someone other than the surviving spouse?
  
  3. Under very restrictive circumstances, a faculty member who terminates employment may get a "refund" of ******** retirement accumulations. Does the law apply in this situation?

The intent of the language that was added to Virginia Code §58.1-322 by the 1986 General Assembly was to ensure that employees of institutions of higher education, not eligible for coverage under the ****************** but covered by the ************** retirement system, would receive similar tax treatment for their retirement benefits as other employees covered by ***********. With the exception of the proration requirements applicable only to ********* retirement benefits, such retirement benefits receive the same Virginia income tax treatment as ******* benefits. Therefore, the following answers to your questions would also be applicable to ************** benefits.

- 1. Yes, a surviving spouse who has assumed the deceased spouse's********** pension may exclude the same amount of the pension from Virginia Taxable Income that the retired employee was excluding prior to their death.
  
  2. Yes, the subtraction from federal adjusted gross income is available to the surviving spouse regardless of the pay-out option chosen. Yes, the subtraction is available to the employee, their surviving spouse, or to any other beneficiary so named.
  
  3. No, if an employee terminates his employment and takes a refund of his contribution plus interest, he will have to pay federal taxes on a portion of the refunded amount. The taxable amount reported as a component of federal adjusted gross income, is not subject to the subtraction from federal adjusted gross income in the computation of Virginia Taxable Income.

In each of the above cases, any applicable subtraction is limited to the amount of ********* retirement benefit that is required to be included in federal adjusted gross income multiplied by the ratio of contributions made while employed by an institution of higher education located in Virginia to the total contributions made while employed by institutions of higher education everywhere.

I hope that this will assist you in answering your employees concerns. If you have any further questions, please do not hesitate to contact me.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner