Could a Virginia domiciliary avoid Virginia tax on another state's pension because he lived there more than 183 days and filed returns there?

Subject

Virginia domiciliary had to report out-of-state pension income

Plain-English summary

Virginia required the taxpayer to file 2006 and 2007 resident returns and include pension income from another state. He remained a Virginia domiciliary even though he spent more than 183 days in State A and filed State A income-tax returns.

Federal law prevents a state from taxing retirement income received by someone who is neither resident nor domiciled there. It did not protect this taxpayer from Virginia tax because he was still domiciled in Virginia. Virginia could tax all of a resident's income, including retirement income derived from employment in another state.

Virginia's other-state credit can relieve double tax on qualifying earned or business income and capital gains. A pension distribution could count as earned income for the credit only to the extent it represented contributions tied to services performed outside Virginia; investment earnings did not. In any event, State A did not tax the pension income, so there was no State A tax on that income to credit.

The Department's assessments were based on available information. The taxpayer was instructed to file Virginia returns within 30 days so the actual liability could be calculated; otherwise the assessments would remain correct and collection would resume.

What this means for you

• Living more than 183 days in another state does not end Virginia tax if Virginia domicile continues.
• Retirement income can remain taxable by the state of domicile even when earned from another state's system.
• An other-state credit requires qualifying income and tax actually paid to the other state.
• File missing returns to replace an information-based assessment with a calculation using your actual income and deductions.

Citations and references

• 4 U.S.C. § 114.
• Va. Code § 58.1-332 A.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-88

Original ruling text

June 10, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2006, and 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a domiciliary resident of Virginia, spent more than 183 days in * (State A) during 2006 and 2007. The Taxpayer filed State A income tax returns but failed to file Virginia income tax returns. Pursuant to an examination by the Department, assessments were issued for the taxable years at issue. The Taxpayer filed an appeal, contending most of his income was derived from State A's retirement system and should not be subject to tax by Virginia.

DETERMINATION

Retirement Income

It is well established 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). Absent any objective evidence to the contrary, Virginia is well within its authority to impose its income tax on all of the income of a Virginia domiciliary resident.

Public Law (P.L.) 104-95, as codified at Title 4 U.S.C.A § 114, however, prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. As such, to the extent it is included in FAGI, retirement income received by an actual or domiciliary resident of Virginia would be included in the computation of Virginia taxable income. In Public Document (P.D.) 02-118 (9/03/2002), the Department determined that, under P.L. 104-95, retirement income received by an actual resident of Virginia was subject to Virginia's income tax even if the retirement income was derived from employment in the other state and the taxpayer remained a domiciliary resident the other state.

In this case, the Taxpayer was an actual resident of State A, but a domiciliary resident of Virginia. Consistent with the determination in P.D. 02-118, Virginia may impose its income tax on all of the Taxpayer's retirement income even though he was actually residing in State A.

Credit for Tax Paid Another State

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these types of income during the same taxable year.

In P.D.86-93 (5/12/1986), the Department ruled distributions from qualified pension and profit sharing plans constitute earned income eligible for the credit only to the extent that the distribution represents compensation for services actually rendered. As such, distributions from a plan that represent the withdrawal of contributions made during a period when the employee rendered services for an employer outside of Virginia would qualify as earned income. Distributions in excess of plan contributions ( i.e. , interest, dividends and other types of investment income) are not considered to be earned income.

The credit is limited, however, 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) and P.D. 12-105 (6/19/2012). In this case, the Taxpayer was subject to tax as a resident in Virginia. Thus, he may be entitled an out-of-state tax credit for taxes paid to State A. However, because State A does not impose its income tax on pension income, no credit would be available for this income.

CONCLUSION

As a domiciliary resident of Virginia, the Taxpayer was required to file Virginia income tax returns. Because the Taxpayer failed to file and Virginia has the authority to tax a resident's retirement income, the Department was correct in imposing tax on the Taxpayer's pension income received from State A.

The assessments at issue are based on information made available to the Department. The Taxpayer may have additional information that would more accurately reflect his Virginia income. Accordingly, the Taxpayer should file Virginia income tax returns for the 2006 and 2007 taxable years.

The returns should be submitted to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond Virginia 23261-7203, Attention: * within 30 days from the date of this letter. If the returns are not filed within the allotted time, the assessments will be considered to be correct and collection action will resume.

The Code of Virginia sections and public documents 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5241259445.D