Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Unemployment, pension distribution
Topic
Credits
Date Issued
09-12-1996
September 12, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter in which you (the "Taxpayers") protest the reduction of a credit for income tax paid to New York claimed on your Virginia return for taxable year 1991. I apologize for the delay in responding.
FACTS
The Taxpayers were Virginia residents who had income from New York sources during 1991, composed of wages, unemployment compensation benefits, and pension distribution income. The Taxpayers filed a Virginia return and claimed an out-of-state tax credit for New York taxes paid on such income.
The Taxpayers' 1991 Virginia return was the subject of an office audit. The credit was adjusted to include only the wage income, and an assessment was issued. The Taxpayers dispute the department's adjustment of the credit, and hereby request relief.
DETERMINATION
Code of Virginia § 58.1-332(A), copy enclosed, provides credit when a Virginia resident becomes liable to another state for income tax paid on any "earned or business" income derived from sources outside of Virginia. The statute does not provide a credit for all tax paid to another state. Rather, it limits the credit to tax paid on "earned or business" income from sources outside of Virginia. Virginia Regulation (VR) 630-2-332(2)(b), copy enclosed, further provides:
For purposes of this credit, the term "earned income" shall mean wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered . . . Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.
At issue here is whether unemployment benefits and pension distributions constitute earned income for purposes of the out-of-state credit. The department has previously issued rulings regarding these issues. See Public Documents (P.D.) 95-201 (7/31/95), 96-127 (6/11/96), and 86-93 (5/12/86), copies enclosed.
Under Tax Reform Act of 1986, unemployment compensation benefits became fully taxable for federal income tax purposes. Because Virginia's individual income tax computation conforms to federal law, this change also affected the taxability of these benefits for Virginia income tax purposes. Consequently, in P.D. 95-201, the department ruled that unemployment compensation benefits should be treated, for tax purposes, in the same manner as wages or other wage-type payments.
In P.D.'s 96-127 and 86-93, the department ruled that pension distribution income, to the extent the distribution represents compensation for services actually rendered, constitutes earned income eligible for the credit. The withdrawal of contributions that were made when the employee rendered services for an employer qualifies as earned income. The documentation provided shows the husband participated in his employer's plan during his employment and made regular contributions. Further, such contributions exceeded the distribution amount on the date of the distribution.
Based on the foregoing information, the department finds sufficient justification to conclude the Taxpayers' unemployment compensation benefits and pension distribution income constitute earned income within the meaning of VR 630-2-332. The department has recomputed the 1991 Virginia income tax liability with a credit for income tax paid on the New York income using the amended return information.
Accordingly, your request for relief is granted. An updated bill will be issued as shown on the enclosed schedule. Interest has been accrued through the date of the appeal. The assessment should be paid in full within 60 days to avoid the accrual of additional interest. Please remit your payment to the attention of *********** Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If additional information is needed, you may contact her at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8746M
Rulings of the Tax Commissioner