Why did a Virginia part-year resident owe more tax after correctly excluding pre-move income from Virginia?

Plain-English summary

A 2017 part-year resident amended his Virginia return to report full federal adjusted gross income, separately remove income earned in another state before becoming a Virginia resident, and reduce his standard deduction and personal exemption. The amendment increased tax.

Virginia upheld the assessment, but not because it taxed the other-state income. The added tax came from correcting the required part-year proration of deductions and exemptions.

The income reporting changed format, not result

The original return had already reduced federal adjusted gross income by State A income. The amended return instead reported full federal adjusted gross income and then separately excluded the income attributable to the non-Virginia period, as the part-year form requires.

Both methods produced the same Virginia adjusted gross income. Virginia did not tax the pre-residency State A earnings.

Why tax still increased

Va. Code § 58.1-303 taxes only the Virginia-resident portion of the year and attributes income and modifications to that period. It also requires:

• personal exemptions prorated by Virginia-resident days; and
• a prorated Virginia standard deduction when the federal standard deduction is used.

The original return claimed unprorated amounts. The amendment reduced them to the proper part-year shares, creating the additional tax.

What this means for you

• Report full federal AGI, then allocate on the part-year return. Do not confuse the reporting format with taxation of pre-move income.
• Deductions and exemptions are also part-year amounts. Excluding outside-period income does not preserve full-year benefits.
• Reconcile Virginia adjusted gross income. Here it stayed the same before and after the reporting correction.
• The net tax effect can increase even when income allocation is correct. Proration may outweigh the exclusion presentation.

Common questions

Q: Did Virginia tax income earned before the taxpayer moved?

A: No. The ruling expressly says the State A income was not subject to Virginia tax.

Q: Why did the amended return owe more?

A: It corrected the standard deduction and personal exemption from full-year amounts to prorated part-year amounts.

Q: How are the amounts prorated?

A: Based on the number of days the taxpayer was a Virginia resident.

Citations and references

• Va. Code § 58.1-303 — part-year income, standard deduction, and exemption rules
• Related Virginia ruling: P.D. 14-67

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-58

Original ruling text

May 20, 2019

Re: § 58.1-1821 Application: Individual Income Tax

Dear Mr. *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2017.

FACTS

The Taxpayer filed a 2017 Virginia part-year resident individual income tax return. The Taxpayer subsequently filed an amended return to make the following changes: (1) increase his federal adjusted gross income (FAGI); (2) report income attributable to his period of residency in * (State A); (3) decrease his standard deduction; and (4) decrease his personal exemption. The changes resulted in an increase in the amount of tax due, and an assessment was issued. The Taxpayer appealed, contending the Department erroneously taxed the State A income he earned prior to becoming a Virginia resident.

DETERMINATION

Virginia Code § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period in which he or she is a Virginia resident and is taxed as a resident only for the portion of the year that he or she resides in Virginia. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, a part-year resident may claim a portion of his Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, a part-year resident may claim a prorated Virginia standard deduction if he claims the standard deduction for federal income tax purposes. See Public Document (P.D.) 14-67 (5/20/2014).

On the Taxpayer’s original return, the amount of FAGI reported was already reduced by the Taxpayer’s income attributable to State A. The amended return merely reported the entire amount of FAGI, then separately accounted for the State A income earned outside his period of Virginia residency, as required by the part-year return form. In each case, the amount of the Taxpayer’s Virginia Adjusted Gross Income (VAGI) was the same. The amended return merely corrected how the FAGI and State A income were reported, compared to the original return which did not properly show the computation of VAGI. Therefore, the Taxpayer’s State A income was not subject to Virginia income tax.

In addition, on the original return, the standard deduction and personal exemption had not been prorated as required under Virginia Code § 58.1-303. The amended return corrected these errors, which ultimately resulted in the additional tax due. As such, the assessment is upheld. Because the assessment has already been paid, no further action is required. A schedule is enclosed detailing the differences between the original and amended returns.

The Code of Virginia sections and public document 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/1831.M

Related Documents

14-67