Virginia Nonresident Return - Subtraction for Retirement Income Previously Taxed by Other States

[Jim11]

Virginia allows a subtraction for a retirement plan distribution when contributions to the retirement plan were previously taxed by another state.  Please explain what one needs to do as a practical matter to include this subtraction in a nonresident return.

Here are my impressions, only, so far.  Do these thoughts sound correct?  I’d appreciate any corrections or additional information that would be helpful to know.

1. This provision apparently allows subtraction of the full amount of retirement income received in the current tax year, up to the total amount the taxpayer contributed to the retirement plan over many years, provided these contributions were taxed in previous years by other states.  

1. If so, should one reduce the subtraction in a Virginia nonresident return by a partial pension plan exclusion in the current tax year by the state of residence?   I did not see language requiring this in what I have read so far in Virginia's tax website.  [Please see an excerpt, below.]  The only test seems to be whether the contributions were taxed by other states in previous years, not whether income is currently being taxed.  

1. Concerning documentation needed to support this subtraction, I assume the contributions printed on the 1099-R would be sufficient to show the upper limit of the subtraction when periodic statements were not issued.  Only the contributions, not earnings on contributions, are considered when determining the maximum subtraction.  Also, without copies of tax returns from the distant past, I assume tax policies in public records from the state of residence would be enough to show the previous contributions were taxed by another State.  

Perhaps TurboTax could consider adding language to the brief prompt for this Virginia subtraction so it will not be misleading at face value.  It currently covers only "retirement plan income taxed by other states".  It does not mention, for example, the role of contributions made during the life of the retirement plan, the effect of any known income earned on these contributions, or any reduction required by pension plan exclusions currently taken in other states. 

Here is the excerpt from Virginia's tax website that I mentioned, above.  (See the section titled “Retirement Plan Income Previously Taxed by Another State”.)

"A Virginia subtraction is allowed for individuals who receive distributions from retirement plans. The subtraction can be taken only if the individual was taxed on contributions originally made to the retirement plan in another state that were deductible from federal adjusted gross income during the same period. ... Conditions for Qualification:

-- Contributions must have been made to an IRS Qualified Plan;

--  The contributions must have been deductible for federal income tax purposes; and

--  The contributions must have been subject to income tax in another state."

See:  https://www.tax.virginia.gov/subtractions#:~:text=A%20Virginia%20subtraction%20is%20allowed,income%2....

[BrittanyS]

The Retirement Plan Income previously taxed by another state works by allowing a subtraction for the retirement income created in another state.  

For example, if you moved to Virginia but your retirement account was set up in North Carolina.  The funds contributed while in North Carolina could be deducted from the Income for Virginia.  

To utilize this deduction, you would follow these steps in TurboTax Desktop:

1. Start with Federal, Click Wage & Income
2. Click Start next to Retirement IRA, 401(k), Pension Plan Withdrawals
3. Enter 1099 as it appears on your form
4. Once Federal Return is complete, move to the state
5. Click Edit next to Virginia
6. Under Retirement, Click Revisit next to Retirement Income Adjustment
7. Answer the question, "Have you ever lived outside Virginia? (to claim the credit, you must have lived outside Virginia)
8. Answer, "Did you contribute to a retirement plan when you did not live in Virginia?" (to claim the credit, you must have contributed to a retirement when you did not live in Virginia.)
9. Answer, "Did your state tax your contributions?" (to claim, your state must have taxed the contributions)
10. Enter the amount of the retirement plan income previously taxed by another state.

If you live in Virginia, you would not need to create a non-resident return to claim the deduction.  You have to enter the information about living in another state and that state taxed the contributions made in that state.  

The documentation used to support this claim would be the 1099-R and documentation showing how much was taxed by the previous state if it is not listed on your 1099-R under state.  Maintaining an accurate record of the information claimed on the return is essential.  

[Jim11]

Hello Brittany, 

Thank you for your prompt reply and for your very clear instructions.

When I click on "Retirement Income Adjustment", the program just cycles back to the same list of "income that Virginia handles differently".  I haven't found the three questions you mentioned after that. 

Previously, however, I entered the total 2022 pension income (an amount less than the total contributions for all time shown on the 1099-R) under "Other Subtractions from Federal Income".  "Learn More" for that section includes the example "retirement plan income taxed by other states".  Hopefully this "other subtractions" section creates the same entries for the Virginia return as you described (?).  

We don't live in Virginia, but I understand we need to file a Virginia nonresident return to report the sale of real estate in Virginia. 

Please let me know if you have any further thoughts.   Thanks again.

[MarilynG1]

If you never lived in Virginia in 2022 and only need to report the sale of real estate there, you don't need to report any other income/subtractions there (i.e., pensions). 

All your other income that carried over from your Federal return would be 'non-Virginia income' and would be subtracted.  Only report the income attributable to the non-resident state. 

Here's more info on Filing a Non-Resident State Return. 

[Jim11]

Hello Marilyn,  

Thank you for your reply.  

Earlier today, I was able to talk with a TurboTax CPA about the proper use of this subtraction in our situation.  After doing some research, he advised that Virginia tax law does not exclude nonresidents from claiming a subtraction for retirement plan income taxed by other states.  He concluded we should include this retirement income subtraction in our return.  

Perhaps this explains why TurboTax’s Virginia nonresident return prompts one to enter this subtraction (and does not offer an opportunity to reverse it) before calculating the percentage of Federal income attributable to Virginia.  

The TurboTax software automatically imports all Federal income into the Virginia nonresident return including retirement income taxed elsewhere.  The program then offers a long list of potentially available subtractions from Federal income, including this one.  Income attributable to Virginia is not entered until after these subtraction questions are answered. 

Thanks again for getting back to me.  I guess this answers our questions for now.  This is definitely an area needing clarification in TurboTax’s nonresident Virginia program.