Could taxpayers subtract unemployment benefits again when calculating the income limit for Virginia's age deduction?

Plain-English summary

Virginia upheld the reduced age deduction because the taxpayers improperly used unemployment benefits to lower the income amount tested for the phaseout. Virginia starts with federal adjusted gross income, then applies any fixed-date-conformity additions and subtractions to reach Virginia federal adjusted gross income.

The federal unemployment exclusion enacted by the American Recovery and Reinvestment Act was already reflected in federal adjusted gross income, so no separate conformity adjustment was needed. Virginia also allowed a subtraction for unemployment benefits included under IRC § 85, but the ruling said unemployment did not reduce “adjusted Virginia FAGI” when calculating the age deduction.

For the rule applied here, a $12,000 age deduction for an eligible person was reduced dollar-for-dollar when a married couple's adjusted Virginia federal adjusted gross income exceeded $75,000. The taxpayers exceeded that threshold, so the Department's adjustment and assessment stood.

Common questions

Q: Was a fixed-date-conformity subtraction required for the unemployment exclusion?
A: No. Virginia said the federal treatment was already reflected in federal adjusted gross income.

Q: Could the taxpayers subtract unemployment again for the age-deduction income test?
A: No. The ruling excluded that adjustment from the phaseout calculation.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(25) and (D)(5).
• IRC §§ 85 and 86.
• American Recovery and Reinvestment Act of 2009; Chapter 2, 2011 Acts of Assembly.

Subject

The American Recovery and Reinvestment Act of 2009

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-56

Original ruling text

April 26, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request correction of the individual income tax assessment issued to * (the "Taxpayers") for taxable year ended December 31, 2010.

FACTS

On their 2010 Virginia income tax return, the Taxpayers subtracted unemployment benefits in determining their Virginia taxable income. The Taxpayers also claimed an age deduction from their Virginia taxable income for the year at issue. Under audit, the Department adjusted the age deduction and issued an assessment. The Taxpayers satisfied the assessment and filed an appeal, contending the Department failed to account for the fixed date conformity modification in its computation.

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 IRC with certain exceptions, 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 federal adjusted gross income (FAGI). Income properly 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.

As noted above, Virginia does not conform to every provision of the IRC. Thus, taxpayers who claim certain items on their federal income tax to which Virginia does not conform are required to make fixed date conformity additions and subtractions. Such additions and subtractions are not considered to be Virginia modifications. Rather, they are added to or subtracted from FAGI as reported on a taxpayer's federal taxable income in order to determine the taxpayer's FAGI for Virginia income tax purposes. For Virginia purposes, Virginia FAGI is calculated by taking a taxpayer's FAGI as reported on its federal income tax return, then adding the taxpayer's fixed date conformity additions (FDCA), and then subtracting the taxpayer's fixed date conformity subtractions (FDCS). As such, the formula for determining Virginia FAGI would be:

FAGI + FDCA - FDCS = Virginia FAGI

Virginia Code § 58.1-322 D 5 provides a deduction to the extent included in the FAGI in the amount of $12,000 for individuals born after January 1, 1939, and have attained the age of 65. This age deduction is reduced by $1 for every $1 that the taxpayer's adjusted Virginia FAGI exceeds $50,000 for single taxpayers and $75,000 for married taxpayers. For the purpose of the age deduction, "adjusted federal adjusted gross income" means federal adjusted gross income minus any benefits subject to federal income taxation solely pursuant to IRC § 86.

In this instance, the Taxpayers subtracted the total unemployment benefits received from FAGI and then calculated the age deduction. Virginia Code § 58.1-322 C 25 allows a taxpayer to subtract the amount received for unemployment benefits included in FAGI under IRC § 85. The American Recovery and Reinvestment Act of 2009 (the "Act") amended IRC § 85(c) to exclude up to $2,400 of unemployment compensation from gross income for benefits received in the 2009 taxable year. In Chapter 2, 2011 Acts of Assembly , the General Assembly advanced Virginia's date of conformity to the IRC to December 31, 2010.

Because the exclusion for unemployment benefits under the Act are recognized in FAGI, no fixed date conformity adjustments were required. Further, unemployment benefits are not allowed as an adjustment in determining adjusted Virginia FAGI. Consequently, the Taxpayers incorrectly reduced their adjusted Virginia FAGI in order to determine the amount of the age deduction. Because the Taxpayers' adjusted Virginia FAGI exceeded $75,000, the Department correctly adjusted the Taxpayers' age deduction. Accordingly, the assessment is upheld.

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 website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4875071011.D