How did Virginia allocate deductions and treat another state's National Guard pay when resident and nonresident spouses filed separately?

Plain-English summary

Virginia ordered one allocation adjustment but kept the out-of-state National Guard income in the resident spouse's taxable income. When a Virginia resident and nonresident spouse file separate state returns after a joint federal return, separately identifiable items belong to the appropriate spouse. Items that cannot be separately accounted for are allocated proportionally using income attributable to each spouse.

The audit had included the nonresident spouse's combat pay when allocating itemized deductions. Virginia sent that calculation back to the auditor for adjustment under the ruling's federal-adjusted-gross-income method.

The resident taxpayer's State A National Guard pay was still taxable by Virginia even though the services occurred elsewhere. Virginia may tax all income of its residents, and the statutory Guard-pay subtraction applied only to service in the Virginia National Guard, subject to its limits. Virginia did allow a credit for income tax paid to State A on the Guard income.

Common questions

Q: Was the State A National Guard pay excluded from Virginia income?
A: No. The taxpayer was a Virginia resident, and the Virginia Guard-pay subtraction did not cover another state's Guard service.

Q: Did Virginia give any relief for State A tax on the same income?
A: Yes. The Department allowed the other-state income-tax credit based on the information provided.

Citations and references

• Va. Code §§ 58.1-322, 58.1-324, 58.1-326, and 58.1-332.
• 23 VAC 10-110-190(B).
• People of New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466 (1937); Mary T. Ryan v. Commonwealth, 169 Va. 414, 193 S.E. 534 (1937).
• Virginia Public Documents 95-251 and 11-170.

Subject

Virginia resident and nonresident spouse file separate state income tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-25

Original ruling text

March 14, 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 request.

FACTS

The Taxpayer, a resident of Virginia, is married to a 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, who was not a resident of Virginia, did not file a Virginia individual income tax return because she had no income from Virginia sources.

Under audit, the Department adjusted the Taxpayer's itemized deductions to reflect his percentage of the couple's joint income. In addition, the Department included the Taxpayer's * (State A) National Guard pay in his Virginia taxable income. The Taxpayer appeals the assessment, contending the spouse's combat pay should not be included in the allocation basis and the State A National Guard pay is not taxable in Virginia.

DETERMINATION

Proportional Allocation

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 determined 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, requiring certain additions, and permits certain deductions and subtractions in computing Virginia taxable income. The Department considers it rational to apportion deductions and exemptions between a husband and wife based on the FAGI. See Va. Code § 58.1-326. Because the Department included the spouse's combat pay when proportionally allocating the itemized deductions, the assessment will be returned to the auditor to be adjusted in accordance with this determination.

National Guard Pay

The Taxpayer asserts that the National Guard pay was derived from services performed outside Virginia and therefore, should not be taxable in Virginia. It is well­established, however, that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In People of State of New York ex rel. Cohn v. Graves , 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained, ". . . the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized. See also Mary T. Ryan v. Commonwealth of Virginia , 169 Va. 414, 193 S.E. 534 (1937). Accordingly, Virginia is well within its authority to impose its income tax on all of the income of the Taxpayer and the Department's adjustments are correct.

Virginia Code § 58.1-322 C 11 allows a subtraction of wages or salaries received by any person for active and inactive service in the National Guard of the Commonwealth of Virginia. The amount of the subtraction is the lesser of the amount of National Guard income received not to exceed the amount of income from 39 calendar days of service, or $3,000. Further, National Guard personnel may only claim the subtraction if their rank is captain (O3) and below. Because the Taxpayer served in State A, the National Guard pay would not be eligible for the Virginia subtraction.

Virginia Code § 58.1-332 allows a credit to Virginia residents on their Virginia individual income tax return for income taxes paid to another state, provided the income is either earned or business income, or gain from the sale of a capital asset upon proof of such payment. The Taxpayer paid income tax to State A on the income earned in State A's National Guard. The Department permitted a tax credit for income tax paid to another state. Based on the information provided, I find the adjustments to the Taxpayer's National Guard pay to be correct.

The Code of Virginia sections and public documents 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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4793524408.D