If I'm a Virginia resident working remotely from home for an out-of-state employer, can I claim a Virginia credit for the income tax that state charged me?

Plain-English summary

This is the remote-work cross-state credit trap, and it's extremely common after the shift to telework. A Virginia resident spent the first three months of 2021 working remotely from his Virginia home for a company based in another state ("State A"). He filed a Virginia resident return and a State A nonresident return, paid State A tax, and claimed a credit on his Virginia return for that State A tax. The Department denied the credit and assessed the difference. The Commissioner upheld the denial.

Virginia only credits tax on out-of-state-source income

Virginia lets residents take a credit for income tax paid to another state (Va. Code § 58.1-332 A) — but only for income "derived from sources outside the Commonwealth." The credit is also capped at the lesser of the tax actually paid to the other state or the Virginia tax on that same income (P.D. 97-301). The key limit here: a Virginia resident cannot claim the credit for tax another state charged on Virginia-source income.

Working remotely from Virginia is Virginia-source income

Where is the income "sourced"? The Commissioner's answer is squarely about physical location: working remotely from Virginia, regardless of where the employer is based, is a "business, trade, profession, or occupation carried on in Virginia," which makes the wages Virginia-source income (Va. Code § 58.1-302; P.D. 17-50). Because it's Virginia-source, the tax State A charged on it doesn't qualify for Virginia's out-of-state credit (P.D. 20-71).

The remedy is against the other state, not Virginia

The assessment stands. But the Commissioner pointed the taxpayer to the right fix: review State A's tax laws to see whether that income was actually taxable there for a nonresident, and if it wasn't, file a refund claim with State A. In other words, Virginia has the primary claim to tax wages earned by a resident working within Virginia, and the taxpayer should recover any tax the other state shouldn't have collected from that state — not by shifting the burden onto Virginia through a credit.

What this means for you

Virginia residents who work remotely

If you live in Virginia and do your job from a Virginia location, that pay is generally Virginia-source income, even if your employer, its headquarters, or its payroll office sits in another state. Virginia taxes it, and it will not give you a credit for another state's tax on it. Before assuming you owe the other state, check whether that state actually taxes nonresidents on income they earned while physically outside its borders — many do not.

If another state withheld or taxed your remote wages

Don't look to a Virginia credit to fix it. Look at the other state's rules and, if it over-taxed income you earned from Virginia, file a nonresident refund claim there. Be aware that a handful of states apply a "convenience of the employer" rule that can tax a remote employee's wages anyway — so confirm the specific state's law (or ask a professional) before filing.

The credit's two limits, in short

Virginia's out-of-state credit (§ 58.1-332) applies only to (1) income sourced outside Virginia that is (2) earned/business income or capital gain, and it's capped at the lesser of the other state's tax or Virginia's tax on that income. Virginia-source income fails the first requirement entirely.

Common questions

Q: My employer is in another state and withheld that state's tax. Can I credit it on my Virginia return?
A: Not if you earned the income while working from Virginia. That's Virginia-source income, and Virginia's out-of-state credit doesn't apply to it — regardless of where your employer is located.

Q: So how do I avoid being double-taxed?
A: The fix runs against the other state. Review its rules for taxing nonresidents; if your remote wages weren't actually taxable there, file a refund claim with that state.

Q: Does it matter that I physically never set foot in the other state during those months?
A: That's the whole point — because you worked from Virginia, the income is sourced to Virginia. Physical work location, not the employer's location, controls.

Q: Would the answer change if I had actually traveled to and worked in the other state?
A: Potentially. Income earned for work physically performed in another state can be out-of-state-source income eligible for the credit (subject to the statutory limits). This ruling addresses income earned while working from Virginia.

Citations and references

Statutes:

• Va. Code § 58.1-332 A — credit for income tax paid to another state on income derived from sources outside Virginia (limited to earned/business income or capital gain, and capped at the lesser of the two states' tax on that income)
• Va. Code § 58.1-302 — definition of Virginia source income, including income from a business, trade, profession, or occupation carried on in Virginia

Prior documents (described here rather than linked): Department determinations P.D. 97-301 (credit capped at the lesser of the other state's tax or the Virginia tax on the income), P.D. 17-50 (remote work performed from Virginia is Virginia-source income), and P.D. 20-71 (no out-of-state credit for tax paid on Virginia-source income).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-126

Original ruling text

November 20, 2025

Re: § 58.1-1821 Application: Individual Income Tax

Dear * :

This will respond to your letter in which you seek correction of the individual income tax assessment issued to you (the “Taxpayer”) for the taxable year ended December 31, 2021.

FACTS

The Taxpayer was a resident of Virginia for the entire 2021 taxable year. During the first three months of 2021, he was employed by a company based in * (“State A”) but worked remotely from his residence in Virginia. The Taxpayer filed a Virginia resident income tax return and a State A nonresident income tax return for the 2021 taxable year. On his Virginia return, the Taxpayer claimed a credit for income tax paid to State A. The Department denied the credit and issued an assessment. The Taxpayer appealed, contending he was permitted to claim a credit for income tax paid to State A.

DETERMINATION

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. 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 Public Document (P.D.) 97-301 (7/7/1997). The credit is also subject to the further limitation that the income upon which the credit may be claimed must be “derived from sources outside the Commonwealth” and otherwise subject to Virginia income tax. See Virginia Code § 58.1-332 A. Thus, Virginia resident taxpayers may not claim credit on their Virginia income tax return for income tax paid to another state on Virginia source income.

Based on the information provided, it appears that the Taxpayer worked remotely from Virginia for an employer based in State A. He reported income attributable to such activities as State A taxable income on his State A nonresident income tax return and claimed credit for tax paid on such income against his Virginia income tax liability. However, working remotely from Virginia, regardless of where the employer is based, would be considered a business, trade, profession, or occupation carried on in Virginia. As such, any income from such activities would be considered Virginia source income. See Virginia Code § 58.1-302 and P.D. 17-50 (4/6/2017). As Virginia source income, any tax paid to another state on such income would not be eligible for the credit under Virginia Code § 58.1-332. See P.D. 20-71 (4/28/2020).

The assessment, therefore, is upheld. The Taxpayer should review State A’s tax laws to determine to what extent that income was subject to tax in State A, and if so, whether he may be entitled to claim a credit on his State A return for income tax paid to Virginia. If such income was not taxable by State A, the Taxpayer should file an appropriate refund claim with State A.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov . The public documents cited are available at 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 and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR 5106.Q

Related Documents

97-301

17-50

20-71