Could a Virginia resident exclude New York wages from Virginia income or claim credit without supplying the New York return?

Plain-English summary

Virginia could tax the resident's New York wages, but an other-state credit might reduce double taxation after documentation. Virginia begins with federal adjusted gross income and may tax all income of its residents, even income earned elsewhere.

Va. Code § 58.1-332(A) allowed a credit for qualifying earned or business income taxed by another state. The credit was limited to the lesser of the other state's tax actually paid or the Virginia tax imposed on that same income. New York's nonresident allocation also had to be reflected in the Virginia limitation calculation.

The taxpayer had not supplied the requested official New York return. Virginia allowed 30 additional days to provide it so the credit could be calculated; otherwise the taxpayer had to pay the assessment and interest.

Common questions

Q: Are out-of-state wages excluded from a Virginia resident's income?
A: No. Virginia may tax all income of a resident.

Q: Does Virginia always credit the full tax paid to another state?
A: No. The ruling applied a lesser-of limitation and required proof from the other-state return.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, and 58.1-332(A).
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937).
• Virginia Public Documents 94-91, 96-350, and 97-301.

Subject

Virginia income tax actually imposed on income earned or derived in other states.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-17

Original ruling text

March 5, 2012

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 letter.

FACTS

The Taxpayer filed a Virginia individual income tax return for the 2007 taxable year. Based on information provided by the IRS, the Department adjusted the Taxpayer's return to match the federal adjusted gross income (FAGI) reported on her federal return and issued an assessment. The Taxpayer appeals the assessment, contending she worked in New York and filed a New York income tax return.

DETERMINATION

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

Taxable Income of a Virginia Resident

The Taxpayer believes she should not have to pay tax to Virginia on income earned in New York. It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." Thus, Virginia may impose income tax on all the income received by the Taxpayer while she was a Virginia resident during 2007. See also Public Document (P.D.) 96-350 (11/27/1996).

Credit for Taxes Paid Other States

Virginia Code § 58.1-332 A does allow Virginia residents a credit on their Virginia return for income taxes paid to another state, provided the income is either earned or business income. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See P.D. 97-301 (7/7/1997). Based on the information provided, the Taxpayer may be eligible for an out-of-state tax credit for the 2007 taxable year; however, a copy of the New York return is required in order to determine the applicable amount.

For the purposes of calculating the Virginia credit, P.D. 94-91 (3/29/1994) provides a calculation to determine the amount of income on which the New York nonresident tax is based. According to this ruling, the allocation percentage calculated on the New York nonresident return, which is used to convert the resident tax to the nonresident tax, must be applied to the New York taxable income calculated as a resident in order to determine the New York nonresident taxable income. The result is used in the numerator of the fraction to compute the limitation imposed by Va. Code § 58.1-332 A.

CONCLUSION

By letter dated June 27, 2011, the Department requested that the Taxpayer provide an official copy of the New York return in order to verify the amount of tax paid. To date, the Taxpayer has not provided the requested information. I will grant the Taxpayer one more opportunity to provide a copy of her 2007 New York income tax return in order to accurately compute the out-of-state tax credit. The documentation must be provided within 30 days from the date of this letter. Otherwise, the Taxpayer should remit payment of assessed tax and interest within 30 days to avoid the accrual of additional interest. Please send the requested information or payment to the Department's Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections cited 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 * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4793524522.D