Could a Virginia resident claim all dependent exemptions but only a proportional share of joint itemized deductions with a nonresident spouse?

Plain-English summary

Virginia allowed the resident spouse's dependent exemptions but upheld proportional allocation of the itemized deductions. The spouses filed a joint federal return, while the Virginia resident filed separately in Virginia and the nonresident servicemember had no Virginia-source income.

The resident claimed all dependent exemptions. Under the cited Department precedent, one spouse's claim on a separate state return showed separate accounting and evidence of mutual agreement. Virginia therefore restored those exemptions.

The resident did not provide sufficient separate-accounting evidence for the itemized deductions. Virginia allocated those deductions between the spouses in proportion to federal adjusted gross income. The Commissioner found that method fair and not prohibited by the servicemember law argument presented.

The assessment was revised and the tax associated with the dependent exemptions was to be refunded with interest. The deduction adjustment remained in place.

What this means for you

• Dependent exemptions and itemized deductions can receive different allocation treatment.
• Consistent separate state-return claims can evidence the spouses' agreement on exemptions.
• Itemized deductions require separate tracing or proportional allocation may apply.
• A partial refund does not mean every challenged audit adjustment was reversed.

Common questions

Q: Were all dependent exemptions allowed?
A: Yes, because the return treatment evidenced the spouses' mutual agreement.

Q: Were all itemized deductions allowed to the resident?
A: No. They remained proportionally allocated for lack of separate-accounting proof.

Citations and references

• Va. Code §§ 58.1-324 and 58.1-326.
• 23 VAC 10-110-190(B).
• Virginia Public Documents 95-251, 99-82, and 11-180.
• Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 40 S. Ct. 228 (1920).

Subject

Department's authority to modify the allocation of exemptions and deductions claimed for federal income tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-193

Original ruling text

December 2, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal 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 member of the armed forces. 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, a military service member, did not file a Virginia return because she had no income from Virginia sources. Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect his percentage of the couple's joint income and issued an assessment for additional tax and interest. The Taxpayer paid the assessment and filed an appeal, contending the Department's apportioning of deductions and exemptions violates the provisions of the Servicemember's Civil Relief Act (SCRA).

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).

Dependent Exemptions

The Taxpayer claimed all of the dependent exemptions reported on the joint federal return. He contends that under the provisions of Va. Code § 58.1-324 and P.D 99-82 (4/21/1999), the Taxpayer and his nonresident spouse may mutually agree on the dependent exemptions, and if said exemptions are not separately accounted for on her separate state income tax return, he is allowed to claim all exemptions in question.

In P.D. 99-82, 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

Under Va. Code § 58.1-324, if a couple is unable to separately account for deductions and exemptions, they must be allocated proportionally between each spouse based on income attributable to each. See Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B. Because the Taxpayer has not provided sufficient evidence of separate accounting for the itemized deductions, Title 23 VAC 10­110-190 B requires a proportional allocation of such deductions based on federal adjusted gross income (FAGI). See P. D. 11-180 (11/1/2011).

The Taxpayer avers that the Department's apportioning methods are prohibited by the SCRA. However, the United States Supreme Court (the "Court") has decided that a state may confine deductions in a manner as Virginia does. See Travis, Comptroller of the State of New York v. Yale & Towne Mfg. Co. , 252 U.S. 60, 40 S. Ct. 228 (1920). In that case, the Court held that there is no unconstitutional discrimination against citizens of other states in confining the deductions of expense to such that are in connection with income arising from the taxing state. As such, the Department finds a proportionate allocation of deductions from income, to be fair, rational and equitable in the absence of separate accounting.

CONCLUSION

Based on the foregoing, the Department's adjustment to the Taxpayer's itemized deductions is upheld. Because the Taxpayer was entitled to claim the dependent exemptions on his Virginia income tax return, the assessment will be revised, and the Department will refund the associated tax paid, plus interest.

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/1-4748124567.D