Did housing, subsistence, and other military compensation count when phasing out Virginia's subtraction for basic military pay?

Subject

Only basic military pay counted toward subtraction phaseout

Plain-English summary

Virginia abated the 2011 assessment because the Department had included compensation other than basic military pay in the subtraction phaseout. The statute allowed eligible extended-active-duty personnel to subtract up to $15,000 of basic pay, reduced the subtraction when basic pay exceeded $15,000, and fully phased it out at $30,000.

For this rule, basic pay meant salary under Chapter 3 of Title 37—37 U.S.C. §§ 201 through 212. Housing and subsistence allowances arose under separate provisions and were not basic pay, even if other military compensation appeared in federal gross income or on Form W-2.

The taxpayer's Leave and Earnings Statements supported the subtraction originally claimed. Because only basic pay counted in the limitation, the assessment was abated.

What this means for you

• Use Leave and Earnings Statements to separate basic pay from other military compensation.
• Do not use total W-2 military wages automatically as the phaseout base.
• Verify the subtraction limits and eligibility rules for the tax year involved.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322 C 23.
• IRC § 3121(i)(2).
• 37 U.S.C. §§ 201-212, 402, and 403.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-75

Original ruling text

May 29, 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 assessments issued to you, * (the "Taxpayer") for the taxable year ended December 31, 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed a 2011 Virginia individual income tax return, claiming a subtraction for basic military pay. Under audit, the Department reduced the subtraction and issued an assessment. The Taxpayer appeals the assessment, contending the Department incorrectly included other forms of military compensation in its calculation of the subtraction limitation.

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 federal adjusted gross income (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.

Virginia Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of military basic pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the taxpayer exceeds $15,000 and is fully phased out when military basic pay reaches $30,000.

Pursuant to IRC § 3121(i)(2), remuneration for members of the uniformed services includes "basic pay as described in Chapter 3 and Section 1009 of Title 37, United States Code." Accordingly, military basic pay eligible for Virginia's subtraction is limited to a military service member's salary as determined under 37 U.S.C. § 201 through § 212. Likewise, the computation of the phase out of the subtraction would include only the basic pay of a member of a uniformed service.

In addition, Title 37 of the United States Code provides a number of other benefits to members of the uniformed services. For example, under Chapter 4 of Title 37, United States Code, military service members may be provided a basic allowance for subsistence (37 U.S.C. § 402) or a basic housing allowance (37 U.S.C. § 403). Because these benefits are not included in Chapter 3 of Title 37, they would not be considered to be included in a military service member's basic pay even though they may be included in his or her gross income.

Accordingly, the compensation reported in a Form W-2 issued to a member of the uniformed services may include items of income other than military basic pay. The Taxpayer's Leave and Earnings Statements for the taxable year at issue support the subtraction as computed by the Taxpayer on his Virginia income tax return. Accordingly, the assessment issued to the Taxpayer for the 2011 taxable year will be abated.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & 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/1-5236321011.D