Can a Virginia resident subtract an employer's moving-expense reimbursement that was already excluded from federal income?

Plain-English summary

A married couple moved to Virginia for the husband's job and, on their 2015 Virginia return, claimed a subtraction for a moving-expense reimbursement. The Department disallowed it and assessed tax. The couple appealed, arguing the reimbursement wasn't really income.

The Department upheld the assessment: Virginia has no subtraction for moving-expense reimbursements — and if the reimbursement was tax-free federally, it never entered the couple's income in the first place, so there was nothing to subtract.

Why there's nothing to subtract

Virginia income tax starts from your federal adjusted gross income (FAGI) and conforms to federal definitions (Va. Code § 58.1-301). Everything in a Virginia resident's FAGI is taxable to Virginia unless a specific Virginia modification (Va. Code §§ 58.1-322.01–322.04) removes it. There is no Virginia modification for moving-expense reimbursements.

For years before 2018, a qualified moving-expense reimbursement was already excluded from FAGI under IRC § 132 — if paid under an employer "accountable plan" (the expenses had a business connection, were properly accounted for, and any excess was returned; Treas. Reg. § 1.62-2). When that happens, the amount appears in box 12 of the W-2 under code P, not as taxable wages in box 1.

So the logic is a one-way street:

• If the reimbursement qualified for the federal exclusion, it was never in FAGI — there is nothing for Virginia to subtract.
• If the reimbursement didn't qualify (not under an accountable plan), it was in FAGI as taxable income — and Virginia taxes it, with no modification to remove it.

Either way, no Virginia subtraction exists.

What happened on this return

The husband's W-2 did show an amount excluded under code P (the tax-free reimbursement). But a much larger, taxable amount on the same W-2 was reported as wages, and the couple included that in their FAGI. They then tried to subtract the reimbursement anyway. Since the tax-free portion was never in FAGI, the Department correctly disallowed the subtraction and upheld the assessment.

If the bill is a hardship

The Department noted that if the assessment causes financial hardship, the couple could pursue an offer in compromise based on doubtful collectibility (Va. Code § 58.1-105 B) using the Offer in Compromise form and Financial Information Statement, or request a payment agreement with the Collections Unit.

What this means for you

• Don't subtract a moving-expense reimbursement on your Virginia return. If it was tax-free, it's already out of your income; if it was taxable, Virginia taxes it.
• Check your W-2: a code-P amount in box 12 is already excluded — you don't get to remove it again.
• This applies to pre-2018 years. The federal moving-expense exclusion was suspended for most taxpayers starting in 2018, which changes the analysis for later years.
• Hardship options exist (offer in compromise, payment plan) even when the tax itself is correctly owed.

Common questions

Q: My employer reimbursed my move and it wasn't taxed federally. Can I subtract it in Virginia?

A: No. If it wasn't taxed federally, it's not in your FAGI, so there's nothing to subtract. Virginia has no separate moving-expense subtraction.

Q: What if the reimbursement was taxable?

A: Then it's in your FAGI and Virginia taxes it — again, there's no Virginia modification to remove it.

Q: I can't afford the bill. What are my options?

A: You can apply for an offer in compromise based on doubtful collectibility or ask the Collections Unit for a payment agreement.

Citations and references

• Va. Code § 58.1-301 — Virginia conforms to Internal Revenue Code terminology unless a different meaning is required
• Va. Code §§ 58.1-322.01 through 58.1-322.04 — Virginia income subtractions/additions (no moving-expense subtraction)
• IRC § 132 — pre-2018 exclusion of qualified moving-expense reimbursements
• Treas. Reg. § 1.62-2 — accountable-plan requirements
• Va. Code § 58.1-105 B — Tax Commissioner's authority to compromise a liability of doubtful collectibility

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-100

Original ruling text

August 27, 2019

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayers, a husband and wife, filed a joint 2015 Virginia resident individual income tax return, claiming a subtraction for moving expense reimbursement. The Department disallowed the subtraction and issued an assessment. The Taxpayers appealed, contending they were entitled to the subtraction because the reimbursement did not constitute income.

DETERMINATION

Virginia Code § 58.1-301 provides that the 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 Virginia Code §§ 58.1-322.01 through 58.1-322.04.

For taxable years prior to 2018, qualified moving expense reimbursements were excluded from FAGI. See IRC § 132. If a taxpayer was reimbursed qualified moving expenses by their employer under an accountable plan, then the income would qualify for the federal exclusion and would not be included in a taxpayer’s FAGI. Instead of being reported as income in Box 1 of a taxpayer’s W-2, it would be reported in Box 12, under code P. To qualify as an accountable plan, the reimbursement arrangement must have ensured that the expenses had a business connection, that the taxpayer provided an adequate accounting of the expenses to their employer within a reasonable time, and that the taxpayer returned any excess reimbursement within a reasonable time. See Treas. Reg. § 1.62-2. Moving expense reimbursements not made under an accountable plan did not qualify for the exclusion. There is no Virginia modification for qualified moving expenses, and because the starting point in computing Virginia taxable income is FAGI, moving expense reimbursements would be subject to Virginia income tax to the extent they were included, if at all, in FAGI.

The Taxpayers claim that the husband’s employment required them to move to Virginia in late 2014. The husband received two form W-2s for the 2015 taxable year. The Taxpayers claim one of those W-2s related to a reimbursement of moving expenses. The W-2 does show an amount excluded from income in Box 12 under code P. A far larger amount of income was reported on that W-2 as taxable, and the Taxpayers included that amount in their FAGI. All income included in the FAGI of a Virginia resident is subject to taxation by Virginia unless it is specifically exempt pursuant to a Virginia modification. As stated above, there is no Virginia modification for moving expense reimbursements. If the reimbursement was not subject to tax, it would not have been included in FAGI.

Accordingly, the Department was correct in disallowing the subtraction and the assessment is upheld. The Taxpayers will receive an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.

The Taxpayers claim they have experienced financial hardship since moving to Virginia. If the assessment creates a financial hardship, the Taxpayers may pursue an offer in compromise based on doubtful collectability. To begin that process, the Taxpayers should complete the enclosed Offer in Compromise Form and Financial Information Statement. The completed form and statement will allow the Department to review and analyze the Taxpayers’ financial situation. Upon completion of that review, a response will be issued to the Taxpayers. The Taxpayers also have the option to request a payment agreement with the Department’s Collections Unit. The Collections Unit may be contacted at (804) 367-8045.

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/2003C