I moved back to Virginia partway through the year and filed a part-year return -- can I exclude the income I earned before my move when computing Virginia's low-income credit?

Plain-English summary

A couple moved back to Virginia in late 2016 but didn't file a Virginia return for that year. When the IRS tipped off the Department, and the couple didn't respond to an information request, the Department assessed them based on the best information available, treating them as full nonresidents with income from a Virginia pass-through entity (PTE). After the couple got involved, the case went through several rounds of correction: the nonresident allocation percentage was set at 100%, then reduced to 77.9% once the Department determined some retirement income wasn't actually from Virginia sources, and later further reduced to 42.7% once some of their wages were also found not to be Virginia-source income. Along the way, the couple also filed a part-year resident return, explaining they'd only lived in Virginia for the last few weeks of 2016 (having paid tax on the rest of their income to another state, "State A") and should only be taxed by Virginia for that short window.

Two separate legal points came out of this tangled case. First, a part-year resident is taxed as a Virginia resident only for the period they actually lived here -- but for any period they were a NONRESIDENT during that same year, they're still taxed on their Virginia-source income for that period too, and don't get Virginia's credit for taxes paid to another state for that portion. Second, and the real sticking point in this ruling: the couple's part-year return also claimed Virginia's credit for low-income individuals, but computed it by excluding the wage and pension income they'd earned before their move back to Virginia. The Department found that improper -- a part-year resident's income earned outside their Virginia residency period is still included in their federal adjusted gross income, and the low-income credit statute doesn't provide any deduction for that income when figuring credit eligibility. Once the excluded income was factored back in, the couple no longer qualified for the credit at all. The case was sent back to the audit staff to finish adjusting the nonresident allocation and to strip the low-income credit from the part-year return, with the Department separately noting the couple might still be able to claim a credit on their State A return for tax paid to Virginia, if State A's own law and deadline allow it.

What this means for you

Anyone who moves to Virginia partway through the year and claims the low-income credit on a part-year return

Don't exclude the income you earned before your move when calculating your eligibility for the credit for low-income individuals. The statute requires your full federal adjusted gross income -- including your pre-move earnings -- to be counted, even though only your post-move income is actually taxed by Virginia.

Anyone who was a nonresident for part of the year and a resident for the rest

Keep in mind you're taxed on your Virginia-source income for the nonresident portion of the year too, and you generally can't claim Virginia's credit for taxes paid to another state on income earned during that nonresident stretch, per Va. Code § 58.1-303 C.

Anyone who moved from a state after paying that state's tax on income now also being sourced to Virginia

Check whether your OLD state offers a credit for tax you end up paying Virginia on overlapping income (rather than assuming Virginia will offer you relief) -- and watch your old state's own statute of limitations, since you may need to file an amended return there to claim it.

Common questions

Q: If I move to Virginia partway through the year, do I have to count my pre-move income when figuring my eligibility for Virginia's low-income credit?
A: Yes, based on this ruling. Your pre-move income is still part of your federal adjusted gross income, and Virginia's low-income credit statute doesn't allow you to exclude it when computing whether you qualify, even though that income isn't itself taxed by Virginia.

Q: Can a part-year resident claim Virginia's credit for taxes paid to another state on income earned before moving to Virginia?
A: No -- per Va. Code § 58.1-303 C, a part-year resident who was a nonresident for part of the year with Virginia-source income during that period is taxed on that income as a nonresident and is not eligible for the credit for taxes paid to another state for that portion.

Q: Can Virginia's Department of Taxation assess me for a return I never filed?
A: Yes -- based on information (often from the IRS) suggesting a filing obligation, the Department can assess using the best information available if a taxpayer doesn't respond to an information request, as happened at the start of this case.

Citations and references

• Va. Code § 58.1-303 (part-year resident taxed for period of Virginia residency; nonresident treatment and no out-of-state credit for pre-move income)
• Va. Code § 58.1-302 (income and deductions from Virginia sources defined)
• Va. Code § 58.1-339.8 (credit for low income individuals)
• P.D. 18-219 (12/28/2018) (a part-year resident's income earned outside their Virginia residency period is still included in FAGI and can't be excluded from the low-income credit computation)

Subject

Virginia Taxable Income : Nonresident - Income from pass-through entity; Credit : Low income - Part-year Resident

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-164

Original ruling text

December 28, 2021

Re: § 58.1-1821 Appeal: 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, 2016. I apologize for the delay in responding to your request.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers may have been required to file a Virginia income tax return for the 2016 taxable year. Because no return was on file and the Taxpayers did not respond to an information request, the Department issued an assessment based on the best information available. The Taxpayers called the Department to dispute the assessment and resulting collection action. Based on the information provided by the Taxpayers, the Department requested that the Taxpayers file a Virginia nonresident return reporting their income from a Virginia pass-through entity (VA PTE).

The Taxpayers submitted a Virginia nonresident return, reporting a 0% nonresident allocation percentage. The Department abated the existing non-filer assessment, adjusted the Taxpayers’ nonresident allocation percentage to 100%, and issued a new assessment. The Department subsequently determined that a portion of the income was retirement income not from Virginia sources and adjusted the nonresident allocation percentage to 77.9%. The Taxpayers appealed, alleging that they already paid taxes to * (State A), and they only should be taxable, if at all, for the last few weeks of 2016, when they moved back to Virginia. Consistent with this assertion, the Taxpayers submitted a Virginia part-year resident return with their appeal.

DETERMINATION

Part-Year Residency

Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of Virginia during the taxable year is subject to taxation for the period in which they were a Virginia resident. Accordingly, Virginia Taxable Income (VTI) is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia.

However, a part-year resident who, as a nonresident of Virginia for any portion of the taxable year, derived income from Virginia sources is also subject to tax as a nonresident and is not eligible for a credit for taxes paid to another state pursuant to Virginia Code § 58.1-332. See Virginia Code § 58.1-303 C.

The Taxpayers’ part-year Virginia return reported that part of their wage and pension income was attributable to their period of Virginia residency. The Taxpayers also claimed the credit for low income individuals under Virginia Code § 58.1-339.8. In computing the credit, it appears that the Taxpayer excluded from the computation that part of their income that was attributable to their period of residence outside Virginia. A part-year resident’s income earned outside their period of Virginia residency, however, is still included in their federal adjusted gross income (FAGI), and Virginia Code § 58.1-339.8 does not allow a deduction for such income for purposes of computing the credit for low income individuals. See Public Document (P.D.) 18-219 (12/28/2018). After factoring such income into the computation, the Taxpayers were not eligible to claim the credit.

Nonresident Income

The income subject to Virginia income tax of a nonresident is computed by multiplying their VTI (computed as if they were a resident) by the ratio of their net income, gain, loss, and deductions from Virginia sources to their net income, gain, loss, and deductions from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss, and deductions attributable to (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery and gambling winnings from wagers placed or paid at a location in Virginia.

The audit staff initially adjusted the Taxpayers’ nonresident return to reflect a nonresident allocation percentage of 100% and issued a new assessment. Subsequently, the audit staff determined that certain retirement income reported on a Form 1099-R was not Virginia source income, the nonresident allocation percentage was reduced to 77.9%, and the assessment was revised accordingly. While the appeal was pending, the audit staff further determined that certain of the Taxpayers’ wages were not Virginia source income and that the nonresident allocation percentage should be reduced to 42.7%. The remaining allocation reflects the sourcing of certain income from VA PTE, which the Taxpayers do not dispute.

CONCLUSION

The Taxpayers failed to file a nonresident return that included their income from Virginia sources during their period of residency outside of Virginia. The Taxpayers properly filed a part-year return for their period of Virginia residency, but were not eligible to claim the credit for low-income taxpayers. The case will be returned to the audit staff to adjust the assessment further in accordance with their findings as to the source of the Taxpayers’ wage income. The part-year return must also be adjusted to eliminate the credit for low income taxpayers.

The Taxpayers will then receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest and possible collection action. The Taxpayers may also be eligible for a credit for taxes paid to Virginia on their State A return, but they would need to determine their eligibility in accordance with State A law and file an amended State A return if they are still within the statute of limitations to do so.

The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. 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/3443-C

Related Documents

18-219