Tax Type
Individual Income Tax
Description
Unearned income of minor child
Topic
Taxable Income
Date Issued
04-19-1995
April 19, 1995
Re: §58.1-1821 Application: Individual Income Tax
Dear*****************
This will reply to your letter of August 19, 1994, in which you and your spouse (the "Taxpayers") protest the disallowance of a subtraction claimed on your Virginia return for taxable year 1992.
FACTS
The Taxpayers filed a joint Virginia individual income tax return for 1992, and claimed a subtraction in determining their Virginia taxable income for the unearned income of their minor child. This income was included in the Taxpayers' federal adjusted gross income as a result of an election under Internal Revenue Code ("I.R.C.") 1(9)(7)
The Taxpayers' subtraction was disallowed by the department on the basis that Code of Virginia §58.1-322(C) does not specifically provide a subtraction for the unearned income of a minor child included in federal adjusted gross income as a result of an I.R.C. §1(g)(7) election. The department had previously published its position on this election in Tax Bulletin 92-11, dated December 1, 1992, copy attached.
The Taxpayers aver that the inclusion of their child's income in their Virginia taxable income is improper because Virginia law only contemplates taxing the income of the person filing the return. Specifically, the Taxpayers believe the department lacks the statutory authority to include the unearned income of a minor child as part of their tax computation.
DETERMINATION
In taxable years prior to 1987, federal law allowed the income from assets transferred to minor children to be taxed to the child at the child's rate. However, the Tax Reform Act of 1986 changed the tax treatment of unearned income of a minor child. Under current federal law, a minor child under age 14 with unearned income will be subject to taxation on a portion of such income at the top marginal rate of the parent. This has become commonly known as the "Kiddie Tax."
For taxable years beginning after December 31, 1988, Congress provided an alternative to the parents of minor children with unearned income. The Technical and Miscellaneous Revenue Act of 1988 (the "1988 Act") provided an election whereby the parents of a minor child, provided certain requirements are met, may include the unearned income of the child on their return, thus eliminating the need to file a separate return on behalf of the child.
Virginia's determination of an individual's adjusted gross income conforms in all material respects to federal law. All items of gain, loss, income and deduction will receive treatment consistent with federal law unless Virginia law specifically provides to the contrary. Code of Virginia § 58.1- 322(A) provides in pertinent part;
The Virginia taxable income of a resident individual means his federal adjusted gross income for the taxable year ... with the modifications specified in this section. (Emphasis added).
In the instant case, you assert that Virginia law does not permit the inclusion of a minor child's unearned income in the parent's tax computation. Specifically, you believe the reference to "his" federal adjusted gross income in Code of Virginia §58.1322(A) should be interpreted to mean the income belonging to the parent, and should not be construed to mean the unearned income belonging to the child included in the federal adjusted gross income of a parent as a result of the federal election.
Under the operation of Code of Virginia §58.1-322, many elections made for federal income tax purposes can have consequences in computing Virginia tax liability. For example, an election by an individual to itemize deductions for federal income tax purposes will require such individual to itemize deductions for Virginia income tax purposes. A taxpayer evaluating an election for federal income tax purposes must also evaluate the impact of the election on his Virginia tax liability because, absent a specific provision in Virginia law to the contrary, a federal election will be binding for Virginia income tax purposes.
An excerpt of the House and Senate Conference Committee Report of the 1988 Act, copy attached, describes the nature and effect of the election codified as I.R.C. 1 (g)(7) as follows:
A parent electing under this provision must include the gross income of the child in excess of $1,000 in his or her income for the taxable year. (Emphasis added).
It is clear from this language that a parent making this election consents to the inclusion of the child's income in his or her federal adjusted gross income. Since federal adjusted gross income is the starting point for Virginia purposes, the end result of this election will be the inclusion of this income in the computation of the parent's Virginia tax liability.
Therefore, without a specific provision in Virginia law, the department has no statutory authority to allow a parent to exclude this income in computing Virginia taxable income. Furthermore, we believe our determination to be consistent with the intent of the Virginia General Assembly. On two prior occasions the General Assembly has considered legislation addressing this issue. Both 1991 House Bill 1556, and 1992 Senate Bill 216, proposed amending Code of Virginia §58.1-322 to provide a specific provision allowing parents who have made the election under I.R.C.§ 1(g)(7) to exclude the unearned income of their minor children in computing Virginia taxable income. The fact that neither bill was enacted leads to the conclusion that the General Assembly is aware that such income is subject to tax, but has chosen not to provide a specific subtraction for it.
Accordingly, your application for relief must be denied. Attached is a schedule of the remaining balance of your assessment which should be paid in full within 30 days to avoid accrual of additional interest. Please forward your payment to the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282. Should you have additional questions regarding this matter, please contact*************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8439L
Rulings of the Tax Commissioner