Did disability income paid by the Virginia Retirement System qualify for Virginia's disability-income subtraction?

Subject

VRS disability income qualified for Virginia's disability subtraction

Plain-English summary

Virginia allowed the taxpayer's 2004 disability-income subtraction. The subtraction applied to qualifying disability income, up to $20,000, incorporated through the federal definition.

The VRS reporting statement classified the payments as disability income under IRC § 72, and the taxpayer's documentation showed that the income met the incorporated federal credit definition for wages or wage-replacement payments during permanent and total disability.

Virginia adjusted the return and abated the assessment.

What this means for you

• Employer-plan payments are not automatically disqualified; the character of the actual disability benefit controls.
• VRS reporting and supporting disability documentation established eligibility here.
• The subtraction is limited by the governing statute and federal definition.

Common questions

What annual limit did the ruling cite?

Up to $20,000 of qualifying disability income.

What happened to the assessment?

It was abated after the return adjustment.

Citations and references

• Va. Code § 58.1-322(C)(4)(b).
• IRC §§ 22(c)(2)(B)(iii), 72, and 105(a).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-125

Original ruling text

August 7, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") by the Department for the 2004 taxable year. I apologize for the delay in this response.

FACTS

The Department received information from the Internal Revenue Service indicating the Taxpayer had income for the 2004 taxable year. The Department requested that the Taxpayer file the proper Virginia individual income tax return or provide an explanation concerning why the income was not taxable. The Taxpayer filed a Virginia income tax return for the 2004 taxable year, on which he claimed a subtraction for disability income. The Department determined that the income in question did not qualify as disability income for purposes of the Virginia subtraction because it was provided by an employer provided plan. The Taxpayer contends the subtraction of disability income is correct and requests abatement of the assessment.

DETERMINATION

Virginia Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal Revenue Code (IRC) § 22(c)(2)(B)(iii). This IRC section provides a federal income tax credit for a portion of disability income as defined under IRC § 72 or §105(a) to the extent such income constitutes wages, or payments in lieu of wages, for the period of time during which an individual is absent from work due to permanent and total disability.

In this case, the income at issue was received from the Virginia Retirement System (VRS). According to the income reporting statement issued by VRS, the income qualified as disability income under IRC § 72. Further, the documentation presented indicates that the income qualified for the credit under IRC § 22(c)(2)(B)(iii).

Accordingly, the disability income the Taxpayer received from VRS for the 2004 taxable year is eligible for the subtraction under in Va. Code § 58.1-332 C 4 b. The income tax return will be adjusted accordingly, and the assessment will be abated.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2206548765.E