Could a taxpayer carry underclaimed 2008-2009 Virginia prepaid-tuition deductions into 2010 when each year's contributions were already fully deductible?

Subject

Underclaimed tuition deductions could not be carried forward

Plain-English summary

The taxpayer could not carry into 2010 prepaid-tuition deductions that he merely failed to claim in 2008 and 2009. Virginia did, however, allow the full documented $6,000 deduction for 2010.

The taxpayer contributed $3,300 to one contract and $2,700 to another in each year. Because the historical limit was $4,000 per contract, all $6,000 was available in each year. He claimed only $4,000 on the 2008 and 2009 returns and tried to add the omitted amounts to 2010.

Virginia distinguished a true carryover—an eligible amount exceeding the annual limit—from an amount that could have been deducted but was not claimed. The prior omissions were not carryovers. The 2010 return was adjusted only to its own $6,000 eligible amount.

What this means for you

• Apply a per-contract limit separately when the statute is structured that way.
• An unclaimed deduction is not automatically a carryover.
• Correct an earlier omission through the amendment rules for that year rather than adding it to a later return.

Citations and references

• Va. Code § 58.1-322 D 7 a.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-167

Original ruling text

September 10, 2014

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, 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed a 2010 Virginia income tax return, claiming a deduction for contributions made to a Virginia prepaid tuition contract. Because the deduction claimed on the return exceeded the maximum amount allowed by statute, the Department denied the deduction and issued an assessment for additional tax and interest. The Taxpayer appeals the assessment, contending that his contributions from the 2008 and 2009 taxable years were under claimed, and the excess amount claimed on the 2010 return includes the under claimed amounts from 2008 and 2009 and should be allowed.

DETERMINATION

Virginia Code § 58.1-322 D 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract, the remainder may be carried forward and deducted in future taxable years.

For the 2010 taxable year, the Taxpayer claimed a prepaid tuition deduction exceeding the limitation. Under review, the Department requested documentation concerning the deduction. The Taxpayer provided payment details for the 2008 through 2010 taxable years. The details show that the Taxpayer maintained two separate contracts. For each of the taxable years, the Taxpayer contributed $3,300 to one contract and $2,700 to the other.

Based on the Taxpayer's documentation, he would have been entitled to claim a total deduction of $6,000 in each taxable year. The Taxpayer, however, only claimed a deduction of $4,000 on each return filed for the taxable year. Rather than amend the 2008 and 2009 returns to reflect the full allowable amount of the deduction, the Taxpayer reported the unclaimed amounts on his 2010 return.

A carryover occurs when the amount of a taxpayer's eligible deduction or subtraction exceeds the annual limitation or the taxpayer is unable to use the full amount of tax credit because his or her tax liability is less than the credit. In such situations, taxpayers may only carryover the amount that exceeds the annual limitation or tax liability. Further, by reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke , Law No. 82­0846 (10/27/1983).

In this case, the Taxpayer failed to claim the full amount of the prepaid tuition deduction in 2008 and 2009 to which he was entitled. The Taxpayer attempted to carry the under claimed deduction amounts forward to 2010. However, because the Taxpayer could have claimed these amounts on his 2008 and 2009 returns, they are not eligible to be carried forward to subsequent taxable years.

The Taxpayer has provided sufficient evidence to show that he was eligible to claim a prepaid tuition deduction in the amount of $6,000 for the 2010 taxable year. Accordingly, the assessment will be returned to the auditor for adjustment to reflect this deduction. After the appropriate adjustments are made, a revised bill will be issued.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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/1-5551581376.D