Can Virginia residents calculate the other-state tax credit before subtracting a historic-rehabilitation credit granted by that state?

Subject

Rehabilitation credit

Plain-English summary

Virginia upheld the assessment because the other-state credit could not exceed tax actually paid. The residents earned income in State A and claimed that state's historic-rehabilitation credit. On their Virginia return, they calculated the other-state tax credit using State A liability before the rehabilitation credit.

Virginia's credit is designed to relieve double taxation and is limited to the lesser of the qualifying tax actually paid to the other state or the Virginia tax imposed on the same income. State A's rehabilitation credit reduced both its tax liability and the amount the taxpayers paid.

The taxpayers therefore had to use the reduced, post-credit State A tax payment. Virginia's audit adjustment was correct.

What this means for you

• Start with the final tax actually paid to the other state after its credits.
• Virginia's credit cannot exceed Virginia tax on the qualifying out-of-state income.
• Keep the other-state return, credit schedules, and proof of payment together.
• A credit used to satisfy another state's tax is not itself tax paid for this Virginia calculation.

Common questions

Did Virginia disallow the historic-rehabilitation credit in State A?

No. It recognized that the credit reduced State A liability; that reduction also lowered the Virginia credit for tax paid there.

What was the result?

The 2007 Virginia assessment was upheld.

Citations and references

• Va. Code § 58.1-332 A.
• P.D. 96-8.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-50

Original ruling text

April 4, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the "Taxpayers") for the 2007 taxable year. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers are Virginia residents who claimed a tax credit on their Virginia individual income tax return for income tax paid to * ("State A"). The income tax due to State A was reduced by a credit for investing in a historic rehabilitation project (the "historic rehabilitation credit"). When filing their Virginia income tax return, the Taxpayers claimed a credit for tax paid to another state based on the total amount of tax due to State A before application of the historic rehabilitation credit. Under audit, the Department reduced the tax credit for tax paid to another state to the actual tax payment and issued an assessment for additional tax and interest.

The Taxpayers appeal the assessment, contending the instructions for the Virginia income tax return states a taxpayer receives credit for the "amount of credit of tax paid to another state." The Taxpayers assert there is no law or regulation that requires reduction of the qualifying tax liability by the amount that State A properly granted as a credit for payment of the State A tax.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of principal residence. The intent of the credit is to grant Virginia residents relief in situations were they are taxed by both Virginia and another state on these types of income. As a general rule, the resident is entitled to a credit for income tax paid to another state which is limited to the lesser of: (1) the amount of tax actually paid to the other state; (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state.

In Public Document (P.D.) 96-8 (3/04/1996) the Department determined that regardless of the rules used in the application of a tax credit, the credit allowed on the Virginia income tax return cannot exceed the income tax actually paid to another state. Any credit issued by another state to a Virginia resident reduces the tax liability to that state and, therefore, reduces the amount of tax actually paid to the other state.

The Taxpayers filed a nonresident income tax return in State A reporting their individual income tax liability and claiming a tax credit against income earned in State A. Because the tax credit reduced the tax liability in State A, the amount of tax actually paid by the Taxpayer was also reduced. As such, the adjustment to the credit for taxes paid to another state on the Taxpayers' Virginia individual income tax return for the 2007 taxable year is correct, and the assessment is upheld.

The Code of Virginia section and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have questions concerning this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4541232784.D