Should Virginia residents subtract Arkansas-source income from federal adjusted gross income or claim a credit for Arkansas income tax paid?

Plain-English summary

Virginia residents removed Arkansas-source income as a subtraction on their 2015 return. Virginia disallowed that subtraction, but the appeal showed Arkansas tax had actually been paid.

The income remained in Virginia taxable income, with double taxation addressed through a credit.

Credit instead of subtraction

Virginia begins with federal adjusted gross income and does not generally subtract another state's source income. Section 58.1-332(A) instead allows a credit for qualifying income taxed by another state.

The credit is capped at the lesser of the other state's tax actually paid or Virginia tax imposed on that same income. Audit had to compute that limitation and revise the result.

What this means for you

• Report worldwide resident income unless a specific Virginia modification applies.
• Use the other-state credit mechanism for qualifying double-taxed income.
• Keep the other state's filed return and proof of tax paid.
• Expect Virginia's proportional credit cap.

Common questions

Q: Did the taxpayers lose all relief?

A: No. They qualified for a credit even though the subtraction was incorrect.

Q: Was a refund guaranteed?

A: Audit was directed to compute the credit and revise the assessment or refund as warranted.

Citations and references

• Va. Code § 58.1-332(A) — other-state tax credit
• Related Virginia rulings cited: P.D. 97-301 and P.D. 16-147

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-18

Original ruling text

March 21, 2019

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 “Taxpayers”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayers filed a 2015 Virginia resident individual income tax return and claimed a subtraction for Arkansas source income. The Department denied the subtraction and issued an assessment. The Taxpayers appealed, contending they were eligible to claim a subtraction for income sourced to another state.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly 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.

Virginia law does not allow a taxpayer to subtract another state’s source income from FAGI for purposes of computing VTI. Instead, Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or gain from the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited 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 Public Document (P.D.) 97-301 (7/7/1997). The limitation is computed by multiplying the individual’s Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income.

Information provided with the Taxpayers’ appeal indicates that they paid income tax to Arkansas. Therefore, they were eligible for the credit for income tax paid to another state under Virginia Code § 58.1-332. The computation of the credit with respect to Arkansas is described more fully in P.D. 16-147 (7/20/2016). The case will be returned to the audit staff to compute the allowable credit and issue a revised assessment or refund, as warranted.

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, located at www.tax.virginia.gov . 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

Related Documents

97-301

16-47