I live in Maryland most of the year but still own a home and vote in Virginia -- can I claim a Virginia credit for the Maryland tax I paid?

Plain-English summary

A taxpayer filed a 2019 Virginia RESIDENT income tax return and claimed a credit for income tax he paid to Maryland. The Department denied the credit and assessed him for the full Virginia tax, reasoning that the Virginia-Maryland reciprocal agreement meant he had no Maryland tax liability to begin with. The taxpayer appealed, arguing that he actually lived and worked in Maryland.

Two kinds of Virginia residents. Virginia Code § 58.1-302 recognizes a DOMICILIARY resident (someone whose permanent home is Virginia and who intends to return there, even if living elsewhere) and an ACTUAL resident (someone who maintains a place of abode in Virginia for more than 183 days of the year, regardless of domicile). The taxpayer spent 290 nights in Maryland in 2019 and had a Maryland abode -- making him an ACTUAL resident of Maryland under the parallel Maryland test.

But he was also a Virginia domiciliary. He spent only 30 nights in Virginia that year, yet he owned the home in Virginia where his spouse lived, held a Virginia driver's license, and was registered to vote in Virginia. Those facts showed he had not abandoned his Virginia domicile, so he remained a Virginia DOMICILIARY resident even though he wasn't a Virginia ACTUAL resident.

Reciprocity doesn't cover dual residents. Virginia's reciprocal agreements (it has them with Maryland, West Virginia, and Pennsylvania under Va. Code § 58.1-342 B) are designed to exempt NONRESIDENTS who merely earn wages working in the other state -- not to sort out a "dual resident" who is a domiciliary resident of one state and an actual resident of the other. The Virginia-Maryland agreement, as updated in 2006 (Virginia Tax Bulletin 06-8), makes this explicit. Because the taxpayer was a dual resident, the reciprocal agreement simply did not apply to him.

The credit -- with a cap. With reciprocity out of the picture, the taxpayer was entitled to Virginia's ordinary out-of-state tax credit under Va. Code § 58.1-332 A. That credit isn't automatically the full amount paid to Maryland; it's capped at the LESSER of the tax actually paid to Maryland or the Virginia tax actually imposed on that same income (computed as a fraction of the taxpayer's Virginia tax liability, per P.D. 97-301). The Department reversed its denial and sent the case back to reinstate the credit, subject to verifying the actual credit amount.

What this means for you

If you split your time between Virginia and a reciprocal state (Maryland, West Virginia, or Pennsylvania)

Merely working in a reciprocal state doesn't automatically settle your residency status. If you spend more than 183 days there AND maintain a place of abode there, you may be an actual resident of that state even while remaining a Virginia domiciliary resident -- and in that "dual resident" situation, the reciprocal agreement doesn't apply to you at all.

If you're confused about domiciliary versus actual residency

Domicile turns on intent and permanent ties (where your home, spouse, driver's license, and voter registration are), while actual residency turns purely on a day count (more than 183 days with an abode in the state) -- and you can be a domiciliary resident of one state while simultaneously being an actual resident of another.

If you're claiming a credit for tax paid to another state

The credit under Va. Code § 58.1-332 A is capped at the lesser of what you actually paid the other state or what Virginia would have taxed on that same income -- so don't assume you can simply subtract the full out-of-state tax bill from your Virginia liability.

Common questions

Q: I thought Virginia and Maryland have a reciprocal agreement so I wouldn't owe tax to both states -- why did the Department say I could claim a Maryland credit instead?
A: The reciprocal agreement only exempts nonresidents who merely work in the other state. Because you were a domiciliary resident of Virginia but an actual resident of Maryland (183+ days plus a Maryland abode), you were a "dual resident," and the reciprocal agreement doesn't apply to dual residents at all -- so the ordinary out-of-state tax credit rules apply instead.

Q: I spent hardly any nights in Virginia last year -- can I still be treated as a Virginia resident?
A: Yes. If you haven't abandoned your Virginia domicile -- for example, you still own a home in Virginia where your family lives, hold a Virginia driver's license, and are registered to vote in Virginia -- you remain a Virginia domiciliary resident regardless of how few nights you actually spend in the state.

Q: Will I get credit for the full amount of tax I paid to Maryland?
A: Not necessarily. The credit is capped at the lesser of the tax actually paid to Maryland or the Virginia tax actually imposed on that same income, calculated as a fraction of your Virginia tax liability. The unit handling your case may review and adjust the claimed amount, but must fully explain any adjustment in writing.

Citations and references

• Va. Code § 58.1-302 -- defines Virginia's two classes of residents: domiciliary residents (permanent home, intent to return) and actual residents (present with an abode for more than 183 days)
• Va. Code § 58.1-342 B -- authorizes Virginia to enter reciprocal income tax agreements with other states exempting nonresidents who work in Virginia; Virginia has such agreements with Maryland, West Virginia, and Pennsylvania
• Va. Code § 58.1-332 A -- allows Virginia residents a credit for income tax paid to another state on income sourced there, capped at the lesser of the tax paid to that state or the Virginia tax imposed on the same income
• Virginia Tax Bulletin 06-8 (12/27/2006) -- the 2006 update to the Virginia-Maryland reciprocal agreement, clarifying that it does not apply to a taxpayer who is a domiciliary resident of one state but an actual resident of the other
• P.D. 97-301 (7/7/1997) -- explains how the out-of-state tax credit limitation is computed (Virginia tax liability multiplied by a fraction of the other state's taxed income over total Virginia taxable income)
• P.D. 18-45 (4/2/2018) -- cited for the same dual-resident/reciprocity-doesn't-apply conclusion

Subject

Residency : Dual - Actual and Domicile; Administration : Reciprocity - Maryland; Credit : Tax Paid to Another State

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-35

Original ruling text

March 16, 2021

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an assessment of individual income tax issued to * (the “Taxpayer”) for the taxable year ended December 31, 2019.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2019 taxable year, claiming a credit for income tax paid to Maryland. The Department denied the credit and issued an assessment, on the basis that the Taxpayer was not liable to pay income tax to Maryland under the reciprocal income tax agreement between Virginia and Maryland. The Taxpayer appealed, contending that the credit should have been allowed because he lived and worked in Maryland.

DETERMINATION

Residency

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia, and Pennsylvania.

The reciprocal income tax agreement between Virginia and Maryland was most recently updated in 2006. See Virginia Tax Bulletin (VTB) 06-8 (12/27/2006). The updated agreement makes clear that reciprocity does not apply to a taxpayer who is a domiciliary resident of one state, but who maintains a place of abode and spends an aggregate of more than 183 days of the taxable year in the other state. In this case, the Taxpayer states that he spent 290 nights in Maryland during the 2019 taxable year. He also had a place of abode in Maryland. The Taxpayer, therefore, would have been considered an actual resident of the state of Maryland. The Taxpayer, however, also filed a Virginia resident income tax return. Because he states that he only spent 30 night in Virginia in 2019, he would have been filing a Virginia resident income tax return as a domiciliary resident of Virginia, not as an actual resident. Further information supplied by the Taxpayer supports his status as a domiciliary resident of Virginia. He owned a personal residence in Virginia in which his spouse lived. In addition, he held a Virginia driver’s license and a Virginia voter’s registration. As a so-called “dual resident” of Maryland and Virginia, the reciprocal agreement did not apply. Therefore, the Taxpayer was permitted to claim credit for income tax paid to Maryland to the extent otherwise permitted by Virginia law. See Public Document (P.D.) 18-45 (4/2/2018).

Out-of-State Tax Credit

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, derived from sources outside Virginia, and subject to Virginia’s income tax. 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 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.

CONCLUSION

Based on the information provided, the Taxpayer was an actual resident of Maryland and a domiciliary resident of Virginia for the 2019 taxable year. As such, the reciprocal agreement between Maryland and Virginia did not apply, and the Taxpayer was permitted to claim a credit for income tax paid to Maryland to the extent allowable under Virginia Code § 58.1-332.

The case, therefore, will be returned to the unit that made the adjustment in order to reinstate the credit. That unit may review the Taxpayer’s computation of the credit if it wishes, but if any adjustment is made to the amount originally claimed, the adjustment must be fully explained and communicated to the Taxpayer in writing. If the credit is adjusted, the Taxpayer will have 90 days from the date of being notified of such adjustment within which to appeal, if he believes the adjustment was erroneous. Once the credit is reinstated, the assessment will be adjusted as warranted, and a refund issued if one is due.

The Code of Virginia sections, public documents and Virginia Tax Bulletin cited are available on-line 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/3559.M

Related Documents

97-301

06-8

18-45