Could a Virginia National Guard captain claim combat, extended-active-duty, and Guard-pay subtractions without deducting the same income twice?

Plain-English summary

Virginia allowed the captain to use more than one military-pay subtraction, but not on the same dollars and only for income included in FAGI. The state provisions covered combat or hazardous-duty compensation, qualifying extended-active-duty basic pay, and Virginia National Guard wages.

The basic-pay subtraction had already been allowed for 2007 and correctly reduced for 2008 under the applicable amount and phaseout rules.

The captain also qualified by rank for the Guard subtraction. Although Guard income entered the basic-pay formula, some remained after the amount actually subtracted. That remaining income was not double-excluded and could support the Guard subtraction, limited by the statutory 39-day or $3,000 cap.

Combat-pay treatment remained open because the W-2 identified federally excluded amounts but did not show whether additional taxable combat or hazardous-duty pay was included in FAGI. The taxpayer received a further evidence period.

What this means for you

• Separate each military pay category and the amount included in FAGI.
• Track amounts used in a formula versus amounts actually subtracted.
• Do not claim two Virginia subtractions on the same income.
• Keep W-2 and military-pay records showing rank, duty, location, and federal exclusion.

Common questions

Q: Can one servicemember qualify for multiple Virginia subtractions?
A: Yes, if the same income is not used twice.

Q: Why was some National Guard income allowed?
A: It remained after the amount actually taken under the basic-pay subtraction.

Q: Was combat-pay treatment finally decided?
A: No. More detail was required to identify taxable combat pay included in FAGI.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(11), (21), and (23).
• IRC § 112(b) and (c)(5).
• 37 U.S.C. § 310.

Subject

National Guard compensation, combat duty pay, and basic military wages.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-133

Original ruling text

July 25, 2011

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 assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2007 and 2008.

FACTS

The Taxpayer, a resident of Virginia, claimed subtractions from the federal adjusted gross income (FAGI) for National Guard and combat duty pay on his 2007 Virginia individual income tax return. He also claimed subtractions for National Guard compensation, combat duty pay, and basic military, wages on the 2008 return.

Under audit, the Department disallowed the subtraction for combat duty pay and National Guard compensation and allowed subtractions for basic military pay. As a result, the Department issued assessments for additional tax and interest for the taxable years at issue. The Taxpayer appeals the assessments, contending that Virginia statutes allow a military servicemember who meets the qualifications to claim multiple military subtractions.

DETERMINATION

Virginia Code § 58.1-301 (provides that terminology and references used in Title 58.1 of the Va. Code 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). 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.

Title 58.1 of the Code of Virginia provides three subtractions for military compensation. Military servicemembers may be eligible for a subtraction for: (1) military pay and allowances earned while serving in a combat zone or qualified hazardous duty area ( Va. Code § 58.1-322 C 23); (2) military basic pay for personnel on extended active duty for periods in excess of 90 days ( Va. Code § 58.1-322 C 21); and (3) wages or salaries received for active and inactive service in the National Guard of the Commonwealth ( Va. Code § 58.1-322 C 11). Servicemembers may be eligible for more than one subtraction, but the same income may not be included in more than one subtraction. In other words, a servicemember may not deduct the same income for both the military basic pay subtraction and the National Guard subtraction.

Further, all of the subtractions under Va. Code § 58.1-322 C are prefaced by the words "To the extent included in federal adjusted gross income." As such, no military compensation excluded from FAGI can be used to claim a military subtraction in computing Virginia taxable income.

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. Under IRC § 112 b the amount eligible for exclusion depends upon rank. Personnel below the rank of commissioned officer may exclude all compensation for service in a combat zone or a qualified hazardous duty area. Commissioned officers may exclude up to the "maximum enlisted amount" for any month under the same circumstances. IRC § 112 c 5 defines the "maximum enlisted amount" as:

the highest rate of basic pay payable for that month to any enlisted member of the Armed Forces at the highest pay grade applicable to enlisted members; plus any special pay entitled to the officer under 37 USC 310 of the Uniformed Services Pay Act the amount of that special pay for that month.

The subtraction provided by Va. Code § 58.1-322 C 21, exempts the portion of the officer's combat duty or a qualified hazardous duty pay included in the FAGI. The Taxpayer's W-2 provided detail of the excluded combat duty or qualified hazardous duty pay but did not provide the detail required to ascertain the officer's active service pay from any taxable combat duty pay. Without such detail, the Department cannot determine if combat duty or a qualified hazardous duty pay was included in the FAGI. However, the Taxpayer may present such detail to the Department within 30 days of the date of this letter for further review.

Extended Active Duty Pay

Virginia Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of basic military 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. The subtraction is available whether the individual is stationed inside or outside of Virginia.

The Taxpayer correctly claimed a reduced extended active duty pay subtraction for the 2008 taxable year. For 2007, the Department granted a military basic pay subtraction based on information provided with the return. The 2007 subtraction permitted was computed in accordance with Va. Code § 58.1-322 C 23.

National Guard Pay

Virginia Code § 58.1-322 C 11 allows a subtraction of wages or salaries received by any person for active and inactive service in the National Guard of the Commonwealth of Virginia. The amount of the subtraction is the lesser of the amount of National Guard income received not to exceed the amount of income from 39 calendar days of service, or $3,000. Further, National Guard personnel may only claim the subtraction if their rank is captain (O3) and below.

The Taxpayer provided evidence of his membership as a captain in the Commonwealth's National Guard; however the National Guard income subtraction was disallowed because the income basis was the same as the basis used to calculate the basic military pay.

After calculating the Taxpayer's military basic pay subtraction, the remaining military income exceeded the $3,000 subtraction. Although this income was included in the formula for calculating the military basic pay subtraction, it was not included in the amount actually subtracted. This remaining income would be eligible for the National Guard subtractions, it was not subject to double exclusion and the subtraction is in accordance with Va. Code § 58.1-322 C 11.

In accordance with this determination, the audit will be returned to the auditor to make the appropriate adjustments. Upon completion of the revised audit, an updated bill will be sent to the Taxpayer. Information required for further review of the combat zone or hazardous duty pay must be furnished within 90 days from the date of this letter. Otherwise, the Taxpayer should remit payment of the revised assessment within 30 days to avoid the accrual of additional interest. Please send the requested information or payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections 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,

Craig M. Burns

Tax Commissioner

AR/1-4620841992.D