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THE CAVALIER ATTITUDE OF VIRGINIA'S DEPARTMENT OF TAXATION REGARDING NONRESIDENTS

For decades Virginia instructions have indicated that nonresidents cannot file as married filing jointly if one spouse does not have Virginia income. This requirement has two fatal problems.

Subsection B subdivision 1 of section 58.1-324 of the Virginia Code provides that a husband and wife may file a joint Virginia income tax return. There nothing to suggest that this does not apply equally where BOTH taxpayers are either residents or nonresidents.

Section 58.1.326 of the Virginia Code only applies to a husband and wife when one is a nonresident. It requires that taxes be determined on separate Virginia taxable incomes unless both elect to determine their joint Virginia taxable income as if both were residents.

The provisions of Subsection B subdivision 1 of section 58.1-324 notwithstanding, Virginia instructions require a Married Filiing Separate return where both husband and wife are nonresidents and both have income but only one has income from Virginia sources. This requirement denies one exemption and cuts the standard deduction in half and if the nonresident taxpayers itemize deductions the preparation of the Virginia return becomes more complicated and could result in the payment of higher taxes to Virginia. In addition the MFS requirement for nonresidents violates the Privileges and Immunities Clause in the United States Constitution as was discussed here several years ago when North Carolina had a similar requirement that was ultimately abandoned in 2006.

When the Virginia Department of Taxation was questioned about the MFS requirement when both husband and wife were nonresidents and only one had Virginia source income, the respondent cited section 58.1-326 which is not the applicable section fo the code. In a second letter the respondent cited subsection B of section 58.1-341 which states " If the income tax libilities of husband and wife (other than a husband and wife described in subdivision 2 of of subsection A) are determined on a joint federal return, or if neither files a federal return:

  1. They shall file a joint Virginia income tax retrun, and their tax liabilities shall be joint and several; or ...

The reason for the parenthetical phrase in subsection B of section

58.1-341 is because subdivision 2 of of subsection A of section 58.1-341 begins with " EVERY (EMPHASIS ADDED) nonresident individual having Virginia taxable income" . Section 58.1.326 precludes "EVERY nonresident from filing a joint return with spouse.

I am now waiting for a third response from the state of Virginia.

Here are sections 58.1-324 and 58.1-326 and the instructions that indicate that nonresidents who filed federal joint returns must file MFS unless both have Virginia.

Section 58.1-324. Husband and wife. A. If the federal taxable income of husband or wife is determined on a separate federal return, their Virginia taxable incomes shall be separately determined. B. If the federal taxable income of husband and wife is determined on a joint federal return, or if neither files a federal return:

  1. Their tax shall be determined on their joint Virginia taxable income; or
  2. Separate taxes may be determined on their separate Virginia taxable incomes if they so elect.

Section 58.1-326. Husband and wife when one nonresident. If husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents.

Instructions

Line 4 - Married, Filing Separate Returns (Filing Status 4)

A separate return must be filed if one of the following applies:

- both husband and wife are nonresidents and both have income from Virginia sources but do not elect to file jointly;

- both husband and wife are nonresidents and both have income but only one has income from Virginia sources; or

- one is a resident and the other is a nonresident with income from Virginia sources and they do not elect to file a joint resident return.

A spouse may claim only those personal exemptions, itemized deductions and other deductions that could have been claimed had a separate federal return been completed.

Where deductions and personal exemptions cannot be accounted for separately, they must be proportionately allocated between each spouse based on the income attributable to each. For example, if you file a joint federal return, one of you is a nonresident and you are unable to account separately for the child and dependent care deduction, that deduction must be proportionately allocated between each spouse based on the income attributable to each. One spouse may never claim less than a whole personal exemption. Even in the case where a husband and wife have equal income and one child, only one spouse may claim that child.

VIRGINIA

FILING STATUS Check the box beside your filing status

Line 1 - Single (Filing Status 1) Use this filing status if you claimed one of the following federal filing statuses on your federal return: Single, Head of Household, for Qualifying Widow(er). If you claimed the Head of Household filing status on your federal return, check the ?Single? filing status box and the ?Head of Household? box on Line 1.

Line 2 - Married, Filing Joint Return (Filing Status 2) BOTH spouses must have Virginia source income. You and your spouse may choose to file a joint return if both have Virginia Source Income and ? you computed your federal income tax liabilities together on a joint federal return; or ? neither of you was required to file a federal return.

When using Filing Status 2 or 3 on Form 763, your spouse?s exemption is included in the ?You? column. Do not claim your spouse as a dependent.

Line 3 - Married, Spouse Has No Income from Any Source (Filing Status 3) Husband and wife may elect to file under this status if ? federal income tax liabilities are determined on a joint federal return; or ? neither files a federal return; or ? one spouse files a separate return and the other spouse has no gross income and was not a dependent of another taxpayer. (Note that in this case, the standard deduction is limited to $3,000.) Also enter your spouse?s name on the line provided.

Line 4 - Married, Filing Separate Returns (Filing Status 4) A separate return must be filed if one of the following applies: ? both husband and wife are nonresidents and both have income from Virginia sources but do not elect to file jointly; ? both husband and wife are nonresidents and both have income but only one has income from Virginia sources; or ? one is a resident and the other is a nonresident with income from Virginia sources and they do not elect to file a joint resident return. A spouse may claim only those personal exemptions, itemized deductions and other deductions that could have been claimed had a separate federal return been completed. Where deductions and personal exemptions cannot be accounted for separately, they must be proportionately allocated between each spouse based on the income attributable to each. For example, if you file a joint federal return, one of you is a nonresident and you are unable to account separately for the child and dependent care deduction, that deduction must be proportionately allocated between each spouse based on the income attributable to each. One spouse may never claim less than a whole personal exemption. Even in the case where a husband and wife have equal income and one child, only one spouse may claim that child.

Cheers,

WDK

Reply to
KEBSCHULLW
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You know I agree with you, and I do think there is a constitutional jurisdiction issue when spouses are forced to file jointly when both are nonresidents and one has no income from sources in the state. The state is asserting jurisdiction to tax an individual over which it has no power -- because that person is not a resident and has no source income.

I also think there is an issue under the Virginia state law, which certainly seems to require separate returns regardless of the federal filing unless both spouses elect to be treated as residents. However, I fear there may be an "out" for the Department.

"Section 58.1-326. Husband and wife when one nonresident. If husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents."

The worrisome clause here is "as may be required by the Department." I suppose the Department would argue that this phrase gives it the power to determine by regulation or form instruction how such a couple must file. Of course that doesn't address the constitutional jurisdiction issue -- but the Department probably wouldn't have the power to determine that anyway.

It sounds like Virginia is going to be stubborn about this. You'll probably have to find somebody who has enough money at stake to be willing to litigate, unless you can get some interest from members of the state legislature. Good luck!

Katie in San Diego

Reply to
Katie

Well, a large percentage of them did go to UVA.

Reply to
Bill Brown

Katie:

Noooo! Under section 58.1-324 of the Virginia Code nonresident taxpayers where only one has Virginia source income and who filed a joint federal income tax return have the OPTION of filing a MFJ Virginia return or the one with Virginia source income can file MFS. That satisfies me and the United States Constitution, i.e., the Priviliges and Immunities Clause in Article IV and the Due Process Clause in the Fourteenth Amendment. Virginia Law is fine. The problem is the Department of Taxation's REQUIREMENT that a nonresident file MFS if his/her spouse does not have Virginia source income

That requirement only applies if one spouse is a Virginia resident and the other is a nonresident. Where one is a resident and the other is a nonresident there could be a tax credit problem for the return of the Virginia nonresident in his state of residency if he filed as if a Virginia resident. Tennessee does not have the traditional income tax so the joint return may not be a problem for some of those taxpayers.

At this time I have no problem with section 56.1-326 or it interpretation by the Department of Taxation.

Thanks, but I think that you have overlooked a couple of things. The Virginia Governor, Tim Kaine, is Chairman of the Democratic National Committee and Virginia's unconstitutional scheme causes a loss of income to the states where the nonresidents live. Not a good situation. Maryland is desperate for all the tax revenue they can come up with. Maryland's estimate of the revenues that would come from slot parlors appears to me to overly optimistic by a bunch and the rollout of the slots parlors is not going well. In addition I believe that Delaware is going for sports gambling. It just crazy!

Oh, BTW, I ran into one of you old buddies, Debra Peterson, at the "Closing the Tax Gap" symposium at Stanford on November 8, 2008. That is the only day in my life that I was ever in a law school building. Nothing like jumping into the deep end of the pool. I was given the opportunity to do my "billion dollar annual tax gap rant" related to IRS's interpretation of section 56(b)(1)(D).

Cheers,

WDK

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Reply to
KEBSCHULLW

That is what I suspected. One would expect better from graduates of the university founded by Thomas Jefferson.

Cheers,

WDK

Reply to
KEBSCHULLW

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