Could a Virginia resident claim all dependent exemptions and itemized deductions from a joint federal return with a nonresident spouse?

Plain-English summary

Virginia allowed the dependent exemptions but left the itemized-deduction result subject to documentation or a corrected proportional calculation. The resident claimed all three dependents, while the nonresident spouse claimed none on the other state return. Virginia treated that as separate accounting and evidence of mutual agreement.

The resident also claimed all itemized deductions but supplied no proof that household expenses were paid separately. Virginia gave her 30 days to document those payments.

Without sufficient proof, the deductions would be allocated between spouses by FAGI. The auditor's existing ratio was itself incomplete because it omitted federal-income items, so any proportional calculation had to be corrected.

What this means for you

• Dependent exemptions and itemized deductions can be allocated differently.
• Consistent state-return treatment can evidence agreement on dependents.
• Separately claiming deductions requires payment records.
• Verify every FAGI component used in a proportional ratio.

Citations and references

• Va. Code §§ 58.1-322, 58.1-324, and 58.1-326.
• 23 VAC 10-110-190(B).
• Virginia Public Documents 95-251, 99-82, and 11-170.

Subject

Itemized deductions and exemptions to reflect percentage of the couple's joint income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-180

Original ruling text

November 1, 2011

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, 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a resident of Virginia, is married to a nonresident of Virginia. For the 2007 taxable year, the couple filed a joint federal income tax return, and the Taxpayer filed a separate Virginia income tax return. The Taxpayer's spouse did not file a Virginia individual income tax return because he had no income from Virginia sources. Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect her percentage of the couple's joint income and issued an assessment for additional tax and interest.

The Taxpayer appeals the assessment, contending she provides 100% of the support for her three dependent children. The Taxpayer provided a copy of her spouse's * (State A) income tax return as proof that he did not claim the dependent exemptions on the State A income tax return.

DETERMINATION

In cases where a Virginia resident and nonresident spouse file separate state income tax returns, Virginia Code § 58.1-326 grants the Department authority to modify the allocation of exemptions and deductions claimed for federal income tax purposes under Va. Code § 58.1-324. Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon the income attributable to each. See also Public Document (P.D.) 95-251 (9/29/1995).

In P.D. 11-170 (9/29/2011), the Tax Commissioner ruled that the apportionment computation for a resident taxpayer is based on his/her federal adjusted gross income (FAGI). Pursuant to Va. Code § 58.1-322, Virginia starts with the FAGI, requires certain additions, and permits certain deductions and subtractions in computing Virginia taxable income. Accordingly, the Department considers it rational to apportion deductions and exemptions between a husband and wife under Va. Code § 58.1-326 based on FAGI.

Dependent Exemptions

In this case, the Taxpayer claimed all of the dependent exemptions from the joint federal income tax return on her separate Virginia income tax return. The nonresident spouse did not claim the exemptions on his state income tax return.

In P.D. 99-82 (4/21/1999), the Tax Commissioner ruled that when a spouse claims dependent exemptions on his/her separate state income tax return, such actions are considered by the Department to be separate accounting and evidence of a mutual agreement between the husband and wife. As such, the Taxpayer was entitled to claim the exemptions on the Virginia income tax return.

Itemized Deductions

The Taxpayer claimed all of the itemized deductions on her Virginia income tax return. She asserts that she paid all of the household expenses, and the husband's salary was placed into savings or used by the husband to pay temporary living expenses. No documentation has been provided to show a separate accounting of the expenses.

The Department's auditor apportioned the deductions between the husband and the wife based on income. However, the auditor failed to include a number of items included in the federal adjusted gross income (FAGI) as required in P.D. 11-170.

I will grant the Taxpayer an opportunity to provide the information to substantiate the separate accounting for itemized deductions claimed on the 2007 Virginia income tax return. Please send the documentation within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. If the requested information is not provided within the allotted time, the assessment will be returned to the auditor and adjusted based on this determination.

The Code of Virginia sections, regulation and public documents cited, along with other reference documents, 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4639219948.D