I claimed credit for German tax I paid on my foreign pension, but the Department denied it for two of the three years because it said my proof wasn't good enough -- what documentation actually satisfies this credit?

Plain-English summary

This ruling shows a genuine taxpayer win on Virginia's specific credit for foreign tax paid on pension income, and clarifies exactly what documentation is enough to claim it. The subject title on Virginia's own site identifies the country involved as Germany, even though the redacted body text refers to it only as "Country A."

A husband and wife filed Virginia PART-YEAR resident returns for 2016 through 2018, claiming credit for tax paid to Germany on retirement income for 2016 and 2018. Under review, the Department found the couple had actually remained Virginia domiciliary residents the whole time and should have filed as FULL-YEAR residents for all three years -- and separately disallowed the German tax credit for 2016 and 2018 because the couple hadn't yet provided sufficient documentation that the tax was actually paid. Assessments followed for all three years.

The couple then filed amended full-year resident returns for 2017 and 2018, conceding the residency point but again claiming the German pension tax credit. The Department denied the credit again on the amended 2017 return, but did NOT deny it on the amended 2018 return -- that year's assessment was simply adjusted per the amended return, the couple paid the remaining balance, and that closed out the 2018 dispute entirely (since the couple hadn't actually had anything denied for 2018 to appeal from, the Department noted they hadn't "set forth grounds" for relief on that year under Va. Code § 58.1-1821).

That left 2016 and 2017 genuinely in dispute. Virginia's credit for foreign pension tax (Va. Code § 58.1-332.1) exists specifically so that Virginia residents taxed by BOTH Virginia and a foreign country on the same pension/retirement income during the same year aren't taxed twice on it -- and the statute's documentation bar is simply proof that the tax was actually paid to the foreign country. The couple, on appeal, produced Germany's own information returns showing the actual income tax withheld or paid from the pension income, together with a written explanation from a German tax professional detailing how the German tax was computed (with a supporting schedule). The Department found this was exactly the kind of proof the statute requires -- nothing more elaborate was needed -- and reinstated the credit for both the 2016 and 2017 taxable years, sending the case back to recalculate the resulting balances or refunds.

What this means for you

Virginia residents receiving a foreign pension or retirement income who paid tax to that country

Keep the foreign country's own information returns (or equivalent official statements) showing the actual tax paid or withheld -- that documentation, especially paired with an explanation from a tax professional in that country showing how the tax was computed, is generally sufficient to substantiate Virginia's foreign pension tax credit.

Anyone whose foreign tax credit was initially denied for insufficient documentation

A denial for lack of proof isn't necessarily final -- gathering and submitting the foreign country's own tax records (information returns, a professional's computation schedule) on appeal, as this couple did, can be enough to get the credit reinstated.

Anyone appealing a year where the Department didn't actually deny anything you're disputing

Make sure you're actually appealing a real, adverse determination for each specific year -- here, the Department noted that because it never denied the 2018 credit (only adjusting the assessment per the couple's own amended return, which they then paid), there was no actual basis to appeal that year at all.

Common questions

Q: What documentation do I need to claim Virginia's credit for tax paid to a foreign country on pension income?
A: Proof that the tax was actually paid -- the foreign country's own information returns or equivalent official documents showing the amount paid or withheld are sufficient, and a tax professional's explanation of the computation (with a supporting schedule) strengthens the claim further.

Q: My foreign tax credit was denied for lack of documentation -- can I still get it reinstated on appeal?
A: Yes, if you can subsequently produce adequate proof of the foreign tax paid. Here, the taxpayers' initial denial was reversed once they submitted the foreign country's information returns and a tax professional's explanation with their appeal.

Q: I filed an amended return and the Department adjusted my assessment without denying anything I'm now disputing -- can I still appeal that year?
A: Generally no, if the Department didn't actually deny the specific relief you're now seeking for that year -- an appeal requires you to set forth grounds for relief from an actual adverse determination, not simply revisit a year where your own amended return was accepted and the resulting balance was paid.

Citations and references

• Va. Code § 58.1-1821 (a taxpayer appealing an assessment must set forth the grounds upon which relief is sought)
• Va. Code § 58.1-301 (Virginia conforms to IRC terminology/references unless a different meaning is clearly required; Virginia tax starts from federal adjusted gross income)
• Va. Code § 58.1-332.1 (credit for income tax paid on pension/retirement income to a foreign country, to the extent included in FAGI, derived from past foreign employment, and subject to Virginia tax; requires only proof the foreign tax was paid)

Subject

Administration : Appeal - Complete - Basis for Relief; Credit : Tax Paid to a Foreign Country - Germany

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-52

Original ruling text

March 22, 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 assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2016 through 2018.

FACTS

The Taxpayers, a husband and wife, filed Virginia part-year resident individual income tax returns for the taxable years at issue. On their 2016 and 2018 part-year returns, the Taxpayers claimed credit for tax paid to * (Country A) on retirement income. Under review, the Department determined that the Taxpayers should have filed full-year resident returns for each of the 2016 through 2018 taxable years on the basis that they had remained domiciliary residents of Virginia. In addition, the credits for tax paid to Country A on retirement income was disallowed as to the 2016 and 2018 taxable years on the basis that the Taxpayers had failed to provide sufficient documentation to prove the tax was paid to Country A. As a result, assessments were issued.

Subsequently, the Taxpayers filed amended 2017 and 2018 Virginia resident income tax returns. The Taxpayers conceded that they should have filed as full-year residents of Virginia, but they again claimed credit for income tax paid to Country A on retirement income. The Department denied the credit claimed on the amended 2017 return and re-issued an assessment. The Department did not deny the credit claimed on the 2018 amended return. The 2018 assessment was adjusted according to the amended return, but a balance remained due. The Taxpayers have paid this balance. The Taxpayers filed an appeal, contending that they were eligible to claim the credit for income tax paid to Country A on retirement income for each of the taxable years at issue.

DETERMINATION

2018 Taxable Year

The Department’s records indicate that the Taxpayers’ amended 2018 Virginia return was timely filed and that the assessment for the 2018 taxable year has been paid. Because the Taxpayers do not dispute that they should have filed a 2018 Virginia return as full-year residents and because the Department did not deny the credit for that taxable year, the Taxpayers have not “set forth the grounds upon which” relief could be considered. See Virginia Code § 58.1-1821.

Foreign Source Retirement Income Credit

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 their 2016 and 2017 federal and Virginia returns reporting pension income as part of FAGI. The Department requested copies of tax returns from Country A to show the actual amount of income tax paid to Country A. The Taxpayers provided copies of Country A information returns showing the amount of income tax paid from the pension’s income. They also provided an explanation from a Country A tax professional concerning how such income is taxed under Country A’s tax laws. The explanation also included a schedule showing the computation of Country A tax due on the pension income. Virginia Code § 58.1-332.1 only requires that taxpayers provide proof that they paid the tax to the foreign country. In this instance, the information returns and explanations provided constitute such proof. Accordingly, the Taxpayers were permitted to claim the credit for income tax paid to Country A for the 2016 and 2017 taxable years.

CONCLUSION

The Department did not deny the credit for the 2018 taxable year, and the Taxpayers have paid the balance due on the 2018 assessment, as it was adjusted based on their amended return. Therefore, no further action is required as to the 2018 taxable year. The case, however, will be returned to the unit that made the adjustments in order to reinstate the credit as to the 2016 and 2017 tax years. With their appeal, the Taxpayers have provided a schedule showing the computation of the credit for the 2016 taxable year on a full-year residency basis. A credit for the full year was already claimed on the 2017 amended return the Taxpayers previously filed.

That unit may review the Taxpayers’ computation of the credits 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 Taxpayers’ liability is adjusted, they 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 credits are reinstated, the assessments will be adjusted as warranted and revised bills will be issued if a balance remains due or refunds issued if an overpayment results. In addition, the reviewing unit is instructed to provide an accounting of the 2016 and 2017 taxable year accounts to the Taxpayers, detailing any remaining balances due or refunds to be issued.

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/3701.B