Could a Virginia resident claim all mortgage deductions from a joint federal return when her spouse was a nonresident?

Subject

Bank records separately traced mortgage deductions to the resident spouse

Plain-English summary

Virginia allowed the resident spouse to claim all of the disputed mortgage deductions because bank statements separately traced the expenses to her. She was a Virginia resident married to an active-duty service member domiciled elsewhere, and the spouse had no Virginia-source income.

The couple filed a joint federal return, while the resident spouse filed a separate Virginia return. When one spouse is a resident and the other is a nonresident and they do not elect joint Virginia resident treatment, each must separately account for income, deductions, and exemptions. Items that cannot be separately identified are allocated proportionally by income.

The Department had initially prorated the deductions after finding the proof inadequate. On appeal, bank statements showed the couple's wages were deposited into separate accounts and all mortgage expenses claimed on both the federal and Virginia returns were paid from the account holding the resident spouse's income.

Virginia found that documentation sufficient. It abated the 2006 assessment and directed a refund with applicable interest.

What this means for you

• A joint federal return does not necessarily require the same Virginia filing treatment when one spouse is a nonresident.
• Separately filing spouses must trace deductions individually when possible.
• Untraceable deductions and exemptions may be divided according to the spouses' income.
• Bank statements and payment records can establish which spouse actually bore an expense.

Common questions

Why did Virginia originally prorate the deductions?

The taxpayer had not initially provided adequate proof that the claimed expenses were separately hers.

What evidence changed the result?

Bank records showing separate wage deposits and payment of every claimed mortgage expense from the account containing her income.

What relief did the ruling grant?

The assessment was abated, and Virginia ordered a refund with applicable interest.

Citations and references

• Va. Code § 58.1-326.
• 23 VAC 10-110-190(B).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-30

Original ruling text

March 31, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2006. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a resident of Virginia married to a nonresident of Virginia, filed a joint federal individual income tax return and a separate resident individual income tax return for the 2006 taxable year claiming itemized deductions. The Taxpayer's spouse, an active duty member of the armed forces domiciled outside Virginia, did not file a Virginia return as he had no income from Virginia sources.

Under review, the Department adjusted the Taxpayer's allocation of itemized deductions proportionally according to income when the Taxpayer failed to adequately account separately for the itemized deductions claimed. The Department issued an assessment for additional tax and interest.

The Taxpayer paid the assessment but has filed an appeal, asserting that she separately paid all of the expenses for which itemized deductions were claimed. Accordingly, the Taxpayer requests a refund for the overpayment of tax.

DETERMINATION

Virginia Code § 58.1-326 states, "if husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents." (Emphasis added.)

When a resident/nonresident married couple does not elect to determine their Virginia taxable income as if both were residents, Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides:

In the case of a married couple, one of whom is a nonresident of Virginia filing separately, each spouse must account separately for items of income deductions, and exemptions. Where such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon income attributable to each. (Emphasis added.)

A review of the bank statements provided by the Taxpayer confirms that the couple's wages were deposited into separate bank accounts. The Taxpayer's income was deposited into a joint bank account. All of the mortgage expenses claimed as itemized deductions on the joint federal return and claimed on the Taxpayer's separate Virginia return were paid solely from this bank account. I find that the documentation provided is sufficient to show that all of the mortgage expenses were accounted for separately.

Based on the foregoing, the Taxpayer correctly allocated the itemized deductions on her 2006 Virginia individual income tax return. Accordingly, the assessment has been abated and a refund with applicable interest will be issued shortly.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3330853334.E