A foreign country withheld tax from my pension but I wasn't required to file a tax return there -- can I still claim Virginia's credit for tax paid to a foreign country without filing that foreign return?

Plain-English summary

A married couple filed a 2017 Virginia resident return claiming a credit for income tax paid on the husband's pension income earned in a foreign country (the ruling calls it "Country A"; Virginia's own case index for this ruling identifies the country as Canada). On audit, the Department disallowed the credit because the couple hadn't filed a tax return in that country to document the tax paid. The couple paid the resulting assessment and appealed, arguing they hadn't been required to file a foreign return in the first place.

Virginia's credit for tax paid to a foreign country on pension income (Va. Code § 58.1-332.1) exists so that Virginia residents aren't taxed twice on the same retirement income -- once by Virginia and once by the foreign country where it was earned. The statute requires proof that the foreign tax was actually paid, but doesn't specifically require a filed foreign tax return. Here, the country in question generally lets nonresidents choose whether to file a return, requiring one only if they owe additional tax or want a refund -- neither of which applied to this couple. Instead, they had official information returns from the foreign country documenting the tax withheld from the pension, and that income was reported in their federal adjusted gross income. The Department found this withholding documentation was adequate proof of payment under the statute, reinstated the credit, and sent the case back to have the assessment adjusted and any resulting refund issued.

What this means for you

Retirees or others receiving pension income from a foreign country

If a foreign country withholds tax from your pension and you weren't required to file a return there, don't assume you're out of luck on Virginia's foreign tax credit. Official withholding statements or information returns from the foreign country can serve as adequate proof of payment even without a filed foreign return.

Anyone whose Virginia audit disallowed a foreign tax credit for lack of a foreign return

This ruling shows the proof-of-payment requirement is about demonstrating the tax was actually paid -- not about producing a specific document type. If a foreign return genuinely wasn't required under that country's own rules, explain that and provide whatever documentation (like withholding statements) does exist.

Accountants preparing returns with foreign pension income

Keep the foreign country's own information returns or withholding statements on file to support a Va. Code § 58.1-332.1 credit claim, particularly for countries that don't require nonresidents to file unless they owe tax or seek a refund.

Common questions

Q: Do I need to file a tax return in the foreign country to claim Virginia's credit for foreign tax paid on pension income?
A: Not necessarily. This ruling confirms the statute requires proof the tax was paid, not proof that a return was filed -- if the foreign country doesn't require nonresidents in your situation to file, other documentation like withholding statements can suffice.

Q: What counts as proof that I paid foreign tax on my pension?
A: In this case, the foreign country's own information returns showing tax withheld from the pension, combined with that income being included in the taxpayer's federal adjusted gross income, was accepted as adequate proof.

Q: What happens after the Department reinstates a disallowed credit like this?
A: The case goes back to the unit that made the original adjustment to recompute the credit and adjust the assessment; any resulting overpayment is refunded, and the taxpayer gets written notice (with appeal rights) if the credit amount is adjusted from what was originally claimed.

Citations and references

• Va. Code § 58.1-301 (Virginia conforms to IRC terminology and starts VTI computation with FAGI)
• Va. Code § 58.1-332.1 (credit for income tax paid to a foreign country on pension/retirement income included in FAGI)

Subject

Credit : Tax Paid to a Foreign Country - Canada, Proof of Payment

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-16

Original ruling text

January 25, 2022

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, 2017.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2017 taxable year claiming a credit for income tax paid on pension income earned by the husband in * (Country A). Under audit, the Department disallowed the credit because the Taxpayers had not filed a Country A income tax return to prove the tax was paid. The Taxpayers paid the assessment and filed an appeal, contending that they were not required to file a Country A return.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that 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 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 Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-332.1 provides a credit for income tax paid on any pension or retirement income to a foreign country to the extent that such income is included in FAGI, derived from past employment in the foreign country and subject to Virginia income tax. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and a foreign country on these types of income during the same taxable year.

The Taxpayers filed 2017 federal and Virginia returns reporting the husband’s pension income as part of FAGI. They provided copies of Country A information returns to the Department showing the amount of income tax withheld from the husband’s pension. The Department’s auditor requested a tax return from Country A to show the actual amount of income tax paid to Country A. The Taxpayers contend that they were not required to file a Country A return and assert that the amount of tax withheld from the husband’s pension represents their Country A income tax liability.

Generally, nonresidents of Country A may elect, but are not required to file a Country A income tax return unless they owe tax, want to claim a refund, or in certain specific scenarios which are not applicable to the current Taxpayers. The Taxpayers have provided documentation showing that Country A income tax was withheld from the husband’s pension income for the taxable year at issue and that such income was included in FAGI. Because they did not file a return to claim a refund, or pay any additional tax due, the amount withheld by Country A properly represents the amount of their tax liability. Further, Virginia Code § 58.1-332.1 only requires that taxpayers provide proof that they paid to the tax to the foreign country. In this instance, the information returns provided constitute such proof. Accordingly, the Taxpayers are permitted to claim the credit for income tax paid to Country A for the 2017 taxable year.

The case, will be returned to the unit that made the adjustment in order to reinstate the credit. That unit may review the Taxpayers’ 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 Taxpayers in writing. If the credit is adjusted, the Taxpayers will have 90 days from the date of being notified of such adjustment within which to appeal, if they believe 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 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/3856.B