Could Virginia residents claim a Virginia credit for California tax on California wages when California law offered the reciprocal credit?

Subject

California return was the place to claim the reciprocal tax credit

Plain-English summary

Virginia upheld the denial of a credit for California tax on the husband's 2013 California wages. Virginia generally does not grant its residents that credit when the other state's law gives the resident a substantially similar credit on the nonresident return.

California ordinarily provided the reciprocal credit in this situation. The couple's California return showed that they had not claimed a credit there for Virginia tax, so the Department suggested amending the California return and requesting a California refund.

The couple's reliance on tax-software instructions did not change the result. Virginia's approval process tested software for processing conformity, not the computational accuracy of every return result.

What this means for you

• Check which state must grant the resident or nonresident credit before claiming it.
• A software-generated result does not override the governing reciprocal-credit statutes.
• Review both states' returns together so the credit is claimed in the correct jurisdiction.
• An amended return may be needed when the credit was claimed in the wrong state or omitted.

Citations and references

• Va. Code § 58.1-332.
• Public Documents 95-175, 97-98, 07-207, 12-156, 13-50, and 13-118, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-88

Original ruling text

April 28, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek the correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, are residents of Virginia. During the 2013 taxable year, the husband earned wage income in California. The Taxpayers filed income tax returns in California and Virginia. On the Virginia return, they claimed a credit for income tax paid to California. The Department denied the credit and issued an assessment. The Taxpayers filed an appeal, contending the instructions provided by the tax software do not agree with the Department's adjustment.

DETERMINATION

Credit for Income Taxes Paid to California

Virginia Code § 58.1-332 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 assets. This same statute provides that the credit "shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by subsection B of this section."

As a general rule, Virginia law does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on the California nonresident return. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return.

Under certain circumstances, the Department has permitted a credit for income tax paid to California. See Public Document (P.D.) 97-98 (2/24/1998) and P.D. 07-207 (12/5/2007). The Department has also addressed a number of issues under which the out-of-state credit would not be permitted. See P.D. 95-175 (6/28/1995), P.D. 12-156 (10/04/2012) and P.D. 13-118 (6/27/2013). A review of the Taxpayers' return does not clearly indicate whether the Taxpayers would be eligible for one of the exceptions.

Tax Preparation Software

The Taxpayers contend that they were merely following the instructions provided by the tax software. The Department recognizes that tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department, however, is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See P.D. 13-50 (4/24/2013).

CONCLUSION

Based on the information provided, the Department correctly denied the Taxpayers' out-of-state credit. Accordingly, the assessment for the 2013 taxable year is upheld. An updated bill will be issued shortly. The assessment should be paid within 30 days to avoid the accrual of additional interest.

The California return provided by the Taxpayers shows they did not request credit for the income tax paid to Virginia. As such, the Taxpayers may want to amend their 2013 California income tax return to claim the credit and request a refund.

The Code of Virginia sections and public documents 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/1-5754120769.D