My wife held an F visa and was a nonresident alien for federal tax purposes -- does that mean her wages earned while we lived in Virginia are exempt from Virginia income tax?

Plain-English summary

A married couple filed a 2017 Virginia PART-YEAR resident income tax return, subtracting out income they said was earned during the portion of the year they lived outside Virginia. Under audit, the Department found that some of that subtracted income was actually WAGE income the wife earned WHILE the couple was already living in Virginia -- so the Department reduced the subtraction and issued an assessment for the resulting additional tax. The couple appealed, arguing the wife was exempt from Virginia income tax entirely because she held an F visa and was classified as a "nonresident alien" (an "exempt individual" under IRS rules) for FEDERAL income tax purposes.

Virginia's residency test is separate from federal immigration/alien-status classifications. Virginia recognizes two kinds of residents: a "domiciliary resident" (someone whose permanent home is Virginia, even if temporarily living elsewhere) and an "actual resident" (anyone who maintains a Virginia home for more than 183 days in the year, regardless of intent or domicile). The couple's own tax filings and a questionnaire they submitted showed they began living in Virginia in June 2017 and spent 199 days there that year -- comfortably over the 183-day threshold. That alone made them Virginia "actual residents" for at least that part of the year, independent of any domicile analysis.

Federal nonresident-alien status doesn't override state residency. The wife's wages were reported and included in the couple's federal adjusted gross income (FAGI) -- and since Virginia's income tax computation STARTS from FAGI, those wages flowed directly into Virginia taxable income for the period she was a Virginia resident. The couple's argument rested on IRS guidance that certain visa holders (including F-visa students) are treated as "exempt individuals" who don't count their U.S. days toward the federal SUBSTANTIAL PRESENCE test, making them nonresident aliens for FEDERAL purposes even while physically present a long time. But that's a federal immigration/tax-classification concept with its own specific purpose -- it has NOTHING to do with whether Virginia treats someone as a STATE resident under Virginia's own residency statute. The wife's residency status for Virginia tax purposes was determined entirely by Virginia law (the 183-day actual-residency rule, satisfied here), not by her federal alien classification. The Tax Commissioner also noted that even if she somehow weren't a Virginia resident, she'd likely still owe Virginia tax on those wages anyway, since she earned them working for an employer IN Virginia -- Virginia taxes nonresidents on Virginia-source income too, absent a specific filing exception.

Because the couple were, at minimum, Virginia actual residents for the period in question, the assessment was upheld. The ruling also flagged an offer-in-compromise process (based on doubtful collectability) the couple could pursue given their stated financial hardship, plus the option of a payment agreement with the Department's Collections Unit.

What this means for you

Individuals on a visa (F, J, or similar) who move to Virginia partway through a year

Don't assume your federal "nonresident alien" or "exempt individual" classification carries over to state tax -- Virginia applies its OWN residency test (a 183-day actual-residency rule, or domiciliary intent), completely independent of federal immigration-related tax classifications, and wages you earn while meeting that Virginia test are Virginia-taxable regardless of your federal alien status.

Couples filing a part-year resident Virginia return

Make sure income you're subtracting as "earned while living outside Virginia" is actually attributable to that period -- wages earned by either spouse AFTER you've become a Virginia resident (whether by domicile or simply by day-count) are Virginia-taxable for that portion of the year, even if the other spouse's situation is different.

Taxpayers who genuinely can't pay an assessment

This ruling is a useful reminder that Virginia has an Offer in Compromise process based on doubtful collectability, plus payment agreements through the Collections Unit -- worth pursuing if a valid assessment creates real financial hardship, rather than continuing to dispute a well-supported liability.

Common questions

Q: If my spouse is a "nonresident alien" for federal tax purposes (say, on an F or J visa), does that make their income exempt from Virginia tax?
A: No -- federal alien/residency classifications are a completely separate legal question from Virginia STATE residency, which is governed entirely by Virginia's own domiciliary-resident and 183-day actual-resident tests.

Q: How is the 183-day "actual resident" test counted?
A: It looks at whether a person maintained a place of abode in Virginia for an AGGREGATE of more than 183 days during the taxable year -- it doesn't require the days to be consecutive, and it applies regardless of the person's domiciliary intent.

Q: If someone isn't a Virginia resident at all, can their wages still be taxed by Virginia?
A: Yes, potentially -- Virginia taxes nonresidents on Virginia-SOURCE income (like wages from a job actually performed in Virginia), unless a specific statutory filing exception applies.

Citations and references

• Public Document 16-11 (2/29/2016) -- confirms that federal resident/nonresident alien classification has no bearing on Virginia state residency determinations

Subject

Residency : Part Year, Nonresident : Foreign Alien Individuals

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-59

Original ruling text

May 18, 2021

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

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

FACTS

The Taxpayers, a husband and wife, filed a 2017 part-year resident Virginia income tax return, subtracting income they claimed was attributable to their period of residence outside Virginia. Under audit, the Department determined that a portion of such income was wage income earned by the wife during her period of Virginia residency. Accordingly, the Department reduced the subtraction in and issued an assessment. The Taxpayers appeal, contending the wife was exempt from Virginia income tax because she was a nonresident alien.

DETERMINATION

Part-Year Residency

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 Code § 58.1-303 provides in relevant part as follows:

Any person who, during the taxable year, becomes a resident of Virginia, whether domiciliary or actual, for purposes of income taxation, by moving to the Commonwealth from without during such taxable year, shall be taxable as a resident for only that portion of the taxable year during which he was a resident of the Commonwealth . . . .

Accordingly, Virginia taxable income for part-year residents is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.

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. 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.

In this case, information included with their federal income tax return indicates that the Taxpayers began residing in Virginia in June 2017. The Taxpayers also indicated on a questionnaire submitted to the audit staff that they resided 199 days in Virginia in 2017. Accordingly, at a minimum, the Taxpayers were taxable as part-year residents on an actual residency basis because they spent more than 183 days in Virginia in 2017. See Virginia Code § 58.1-302.

Nonresident Alien

The Taxpayers represent that the wife was a nonresident alien who earned wages in 2017 under an F visa. The Taxpayers cite to information published on-line by the IRS concerning the taxation of resident and nonresident aliens, Topic No. 851, which explains that “exempt individuals” include students temporarily in the United States under an F visa. The Taxpayers argue that because the wife was “exempt” from being considered a resident alien for federal income tax purposes, she could not be liable for the income tax imposed by the Commonwealth on its residents.

Nonresident aliens engaged in trade or business within the United States during the taxable year are subject to federal income tax at the graduated rates provided under IRC § 1 on taxable income effectively connected with the conduct of a trade or business. See IRC § 871(b)(1). In determining taxable income for such purpose, gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. See IRC § 871(b)(2). Nonresident aliens who are temporarily present under certain types of visas, including an F visa, are treated as nonresident aliens engaged in trade or business within the United States, and certain kinds of income they receive, including wage income, are treated as effectively connected with the conduct of a trade or business within the United States. See IRC § 871(c).

IRC § 61(a) defines gross income as income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” Wages are reported to the IRS on Form W-2 and are generally considered income to the recipient for federal income tax purposes. See Treas. Reg. 1.61-2(a)(1). Thus, wages that are, by definition, included in FAGI are also included in the computation of VTI.

The information provided indicates the wife’s wages from employment were included in FAGI on her federal income tax return. As explained above, the wife was considered a Virginia resident for at least the period of her part-year residency, and any wages earned during such period would have been includable in VTI. Further, the Taxpayers indicated that she worked for her employer in Virginia. Thus, even if she had not been a resident of Virginia, she would have been liable for Virginia income tax on such wages as income from Virginia sources, unless she met the filing exception described in Virginia Code § 58.1-321. See Virginia Code § 58.1-325.

The Taxpayers believe the wife’s status as a nonresident alien for federal income tax purposes means that she could not be subject to Virginia income tax as a Virginia resident. An individual’s residency status for Virginia income tax purposes is determined by Virginia law. A taxpayer’s status as a resident or nonresident alien, as the case may be, for federal income tax purposes has no bearing on the determination whether an individual is subject to Virginia income tax as a Virginia resident. See also Public Document (P.D.) 16-11 (2/29/2016).

CONCLUSION

As part-year Virginia residents as defined by Virginia law, the Taxpayers were liable for income tax on that portion of their income attributable to their period of Virginia residency. In addition, the wife’s status as a nonresident alien for federal income tax purposes had no bearing on whether or not her income was taxable by Virginia. Accordingly, the assessment is upheld. A revised bill will be issued 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 and possible collections actions.

The Taxpayers indicate that the assessment will create a financial hardship. 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 Individual Offer in Compromise: Doubtful Collectibility form and Financial Statement for Individuals, and include the required fee or fee waiver request. The completed forms 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 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 call * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3424.M

Related Documents

16-11