Resident of PA filing an amended non-resident Virginia form 763 seeking partial refund of VA income taxes paid on capital gains

[blint]

My wife and I are Pennsylvania residents and we work in PA. In early 2020 she sold a small piece of Virginia farmland bequeathed to multiple grandchildren some years ago which had gained some value in the time since it was inherited.  We filed separately. She paid federal income tax on the capital gains and Virginia non-resident income tax on them and filed a form GL with Pennsylvania seeking a credit for the taxes she paid to VA.  PA said that form GL is only for use with states where PA does not have a reciprocal agreement and charged her for the tax and hit her with some penalties and interest. So she has now paid PA income tax on those capital gains as well.  The denial letter from the PA DEPT of REVENUE advised her to file for a refund in Virginia but we have no clue how to complete an amended VA-763 in such a way as to get a credit on the amount she paid to PA, and neither do the tax assistants we get connected to when we call the VA tax phone number.   Is there a way to get such specific advice on this forum?

[DanielV01]

Pennsylvania has this wrong in their notice.  I suggest you call them back.  They are correct that Virginia and Pennsylvania are reciprocal states, but the following link (state of PA website) says clearly that the reciprocal agreement applies only to employee pay, not capital gains:  How does working in a reciprocal agreement state affect my state income tax?

Pennsylvania should allow you to claim a credit for the capital gains because it appears that the capital gains in question is taxable to Virginia.  (Click here for a consideration of Virginia's taxation of nonresident income).  Or the correct treatment in Pennsylvania is to "simply" exclude the income (there is a way to do this in TurboTax if this is the correct treatment).  So my recommendation is to call Pennsylvania and find out if they sent you that notification in error or if the correct treatment is to exclude the income as not taxable in PA.  If the former, the phone call should resolve it.  If the latter, you will need to prepare a Pennsylvania (not Virginia) amended return.  If that is the case, and you have questions, please re-post those questions and we can provide further guidance.

[blint]

That was exactly my thinking early on but when we called PA DEPT of REVENUE, the representative said that "compensation" is to be understood broadly and would include income of any kind, not wages only.   I spoke by phone with a tax preparer in VA who said "it all comes down to AGI".   We've filed amended returns in both states and will see what happens.    It could be months before we hear anything.

[blint]

Further information that agrees with what you have said! 

 Spoke with a PA DEPT OF REVENUE rep who said our attempt to claim a credit for tax paid to VA on capital gains from sale of land in VA was disallowed by PA in error.  From the PA DEPT OF REVENUE website:

"Pennsylvania has signed reciprocal agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia under which one state will not tax employee compensation, subject to employer withholding of the other state. These agreements apply to employee compensation only."  [my emphasis]

https://revenue-pa.custhelp.com/app/answers/detail/a_id/268/~/how-does-working-in-a-reciprocal-agree...

That is the page you referred to above.

We filed correctly the first time, seeking a credit on Schedule G-L for the tax paid on the capital gains.  And we can seek a credit from VA for taxes paid to PA on wages earned in PA.

[blint]

And here's another piece of information showing that the PA DEPT of REVENUE should credit me for the capital gains tax paid to VA:

https://revenue-pa.custhelp.com/app/answers/detail/a_id/851/related/1

Example: Mike is a resident of Pennsylvania and commutes to his job in New Jersey. He also has rental income from a New Jersey summer cottage. Mike must report as PA taxable income both his compensation and his rental income.

He must request a refund of the NJ income tax withheld from his compensation. He may not claim a credit for the income tax paid to New Jersey on his compensation, but he may claim a credit for taxes paid to NJ on his rental income. He must attach a copy of his W-2 statement showing the NJ withholding and a copy of his NJ nonresident tax return to his PA return when it is filed.

[emphasis mine]

[DanielV01]

@blint:  Now all you need to do is convince PA.  In your response to the letter, you can reference that information you quote.  Keep in mind that a state website is not absolute authority for the tax agency (you'd have to go to the law code itself for that level of authority), but in general, most agents will respect it.  

But your research is spot-on, and Pennsylvania should credit you for what you pay on the income to Virginia, (limited to how much Pennsylvania taxes that same "double-taxed" income).