What does Virginia Ruling of the Tax Commissioner P.D. 09-9 conclude about Military wages resulting from combat duty or extended active duty?

Subject

Combat and extended-active-duty pay subtractions were limited

Plain-English summary

Virginia upheld adjustments to both combat-pay and extended-active-duty subtractions. The husband's 2005 and 2006 enlisted combat pay was not included in the couple's federal adjusted gross income. Because Virginia's combat-zone subtraction applied only to eligible pay included in federal income, the already excluded pay could not be subtracted again.

For 2007, the couple claimed the full $15,000 extended-active-duty subtraction. The cited rule reduced that subtraction when basic military pay exceeded $15,000 and eliminated it at $30,000. The auditor's reduction by the amount above $15,000 therefore stood.

The ruling noted that the extended-duty subtraction was available for qualifying service exceeding 90 days whether the member was stationed inside or outside Virginia.

What this means for you

• Reconcile combat pay to the amount actually included in federal adjusted gross income.
• Do not subtract income already excluded federally.
• For the historical extended-duty rule, calculate the phaseout from total basic military pay.
• Duty location did not control the extended-duty subtraction, but service duration and pay did.

Common questions

Why was enlisted combat pay ineligible?

It was already excluded from federal adjusted gross income under IRC § 112.

How did the $15,000 extended-duty limit work?

The subtraction decreased as basic pay rose above $15,000 and fully phased out at $30,000.

Did service have to occur outside Virginia?

No. The ruling said the extended-active-duty subtraction applied inside or outside Virginia.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(21), (23).
• IRC § 112.
• P.D. 08-182.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-9

Original ruling text

February 4, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter appealing the individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2005 through 2007.

FACTS

The Taxpayers, a husband and a wife, are residents of Virginia. They claimed subtractions on their 2005 through 2007 Virginia individual income tax returns for military wages resulting from combat duty or extended active duty. The Department disallowed the subtractions for combat duty pay on the 2005 and 2006 Virginia returns, and adjusted the subtraction for extended active duty pay on the 2007 return. The Taxpayers appeals the assessments, asserting that the military wages at issue are exempt from Virginia tax.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI) as defined by the IRC as it existed on December 31, 2007, with two exceptions. See Public Document (P.D.) 08-182 (10/17/2008). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

Combat Duty Pay

To the extent included in FAGI, Va. Code § 58.1-322 C 21 allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress.

Pursuant to IRC § 112, enlisted military personnel can exclude amounts received as compensation for active duty service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States. In addition, officers serving in these areas are allowed a partial exclusion for such compensation. Because of Virginia's conformity with federal law, the Virginia subtraction only exempts the remaining portion of an officer's military pay attributable to service in a combat zone or a qualified hazardous duty area. Because enlisted military personnel's combat duty pay would not be included in FAGI, it is not eligible for the subtraction.

The husband was on active duty in a combat zone during the 2005 and 2006 taxable years. The information provided gives no indication that any of the husband's combat pay was included in the Taxpayers' FAGI for the taxable years at issue. As such, the subtraction provided by Va. Code § 58.1-322 C 21 is not available, and the Department's adjustment is correct.

Extended Active Duty Pay

To the extent included in FAGI, Va. Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of military basic pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the taxpayer exceeds $15,000 and is fully phased out when basic military pay reaches $30,000. This subtraction is available whether the individual is stationed inside or outside of Virginia.

For 2007, the Taxpayers claimed a military pay subtraction in the amount of $15,000. A review of that return shows that the husband's military pay exceeded $15,000. Under audit, the Department auditor reduced the Taxpayers' subtraction by the amount that the husband's military pay exceeded $15,000. Accordingly, the adjustment to the Taxpayers' military pay subtraction is in accordance with Va. Code § 58.1-322 C 23 and is correct.

Conclusion

The assessments for the 2005 through 2007 taxable years are correct and remain due and payable. The enclosed schedule shows the current balance due. Payment should be mailed to the Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, ATTN: *, P.O. Box 27203, Richmond, Virginia 23261-7203. Payment must be received within 30 days from the date of this letter to avoid the accrual of additional interest.

The Code of Virginia sections and public document cited, along with other reference materials, are 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 about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2510687408.E