Could recipients claim Virginia's disability-income subtraction when neither spouse was the permanently disabled individual for whom the payments were approved?

Subject

Taxpayers' subtraction for disability income disallowed

Plain-English summary

Virginia upheld denial of the disability-income subtraction. The taxpayers argued that the payments retained their federal disability-income character after the permanently disabled person died and payments continued to a spouse.

Virginia did not dispute the federal characterization. But the state subtraction required two conditions: the individual had to receive disability income and had to be absent from work because of permanent and total disability.

Neither spouse claiming the subtraction was the individual for whom the disability income was approved. They therefore could not claim the historical Virginia subtraction, and P.D. 10-153 remained the Department's final determination.

What this means for you

• Income characterization alone did not satisfy the former Virginia subtraction.
• The claimant also had to be the permanently and totally disabled individual absent from work.
• Successor or survivor payments did not automatically transfer the subtraction in this ruling.

Citations and references

• Va. Code § 58.1-322 C(4)(b), as then in effect.
• IRC § 22(c)(2)(B)(iii).
• P.D. 10-153.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-32

Original ruling text

March 3, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter seeking reconsideration of the Department's determination letter, issued as Public Document (P.D.) 10-153 (7/28/2010), to * (the "Taxpayers").

FACTS

In P.D. 10-153, the Department determined that the Taxpayers, a husband and wife, were not entitled to the disability income subtraction for the taxable years at issue because the husband, who received the income, was not permanently and totally disabled.

The Taxpayers request a redetermination, contending the payments qualified as disability income under Internal Revenue Code (IRC) § 22(c)(2)(B)(iii), and neither the Code of Virginia nor the IRC re-characterize this type of income once the permanently disabled person dies and subsequent payments are made to the spouse.

DETERMINATION

Virginia Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under IRC § 22(c)(2)(B)(iii). In P.D. 10-153, the Department found that an individual must meet two tests in order to be allowed a subtraction for disability income on the Virginia individual income tax return.

The individual must receive disability income, and The individual must be absent from work because of a permanent and total disability.

While the Department does not dispute the characterization of the income under the IRC, the deduction under Virginia Code § 58.1-322 C 4 b can only be claimed by an individual who is permanently or totally disabled. Because neither the husband nor his current wife is the individual for whom the disability income was approved, the Taxpayers are not eligible to claim the Virginia subtraction.

While I recognize your continuing disagreement with the validity of the assessment, P.D. 10-153 clearly explains the Department's authority for disallowing the Taxpayers' subtraction for disability income and constitutes the Department's final determination on this issue.

Accordingly, the assessment is upheld and remains due and payable. A schedule is enclosed showing the current outstanding balance. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23218-7203, Attention: *.

The Code of Virginia section and public document 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 regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4555455795.E