IMPORTANT INFORMATION REGARDING TAX BENEFITS FOR MEMBERS OF THE ARMED FORCES FILING EXTENSION GRANTED WHILE SERVING IN COMBAT ZONE

Tax Commissioner Kenneth W. Thorson has announced that, for taxable year 2004 and taxable years thereafter, Virginia will provide extensions and other tax benefits to members of the Armed Forces serving in areas designated as combat zones. For purposes of the Virginia extensions and other tax benefits, the term “combat zone” includes hazardous duty areas and contingency zones that qualify for similar federal extensions and tax benefits.

Members of the Armed Forces serving in a combat zone will receive either the same individual income tax filing and payment extensions as those granted to them by the IRS, plus an additional fifteen days, OR a one-year extension, whichever date is later. For taxable year 2004, this means that members of the Armed Forces serving in a combat zone will receive a filing and payment extension to the later of the date offered by the IRS plus fifteen days, OR May 2, 2006.

While the filing and payment obligations of a member of the Armed Forces are suspended because of service in a combat zone, Virginia will also suspend the service member’s obligation to make installment payments of estimated income tax. Virginia will also suspend collection activities for any delinquent taxes attributable to other taxable years during the extension period. No penalty or interest will accrue during the extension period.

All extensions also apply to spouses of military personnel. Service families may wish, however, to file their individual income tax returns before the extended deadlines to receive refunds.

Service members who claim this extension should write “Combat Zone” on the top of tax returns, as well as any notice issued by the Virginia Department of Taxation to combat zone personnel regarding tax collection or examination, and on the outside of the return envelopes used to mail the return.

Members of the Armed Forces may be eligible for several other tax benefits in addition to those listed above. For example, combat pay will be totally excluded from Virginia taxable income for both enlisted personnel and officers, unlike federal law. Under current federal law, enlisted military personnel can exclude amounts received as compensation for active duty service in a "combat zone" pursuant to Internal Revenue Code (IRC) §112. Federal law, however, grants only a limited exclusion to commissioned officers.

Filing requirements for members of the Armed Forces are generally based on income and residency status.

Additional Information

Who Must File

Residents (including dependents and students) must file an individual income tax return if:  Single, and Virginia adjusted gross income is $7,000 or more Married, filing a joint or combined return, and total Virginia adjusted gross income for both spouses is $14,000 or more Married, filing a separate return, and Virginia adjusted gross income is $7,000 or more

Virginia adjusted gross income is your federal adjusted gross income (from your federal income tax return) plus any Virginia additions and minus any Virginia subtractions computed on Schedule ADJ.  Virginia adjusted gross income does not include standard or itemized deductions, the child and dependent care expense deduction, or personal exemptions.

Nonresidents are subject to the same requirements as residents.  This means that the filing threshold for a nonresident is determined by Virginia adjusted gross income computed as a resident (see line 10 of Form 763), which includes income from all sources.  The filing threshold for a nonresident cannot be based solely on income from Virginia sources.

Part-Year Residents are also subject to the same requirements as residents.  In computing Virginia adjusted gross income for a part-year resident (see line 10 of Form 760PY), the Virginia subtractions will include the subtraction for income received while living in another state.

Who Should File

If your income is below the filing threshold for your filing status, but Virginia income tax was withheld from any payments you received, file a return to apply for a refund of the Virginia individual income tax withheld.

Residency

Virginia law imposes individual income tax filing requirements on virtually all Virginia residents, as well as on nonresidents who receive income from Virginia sources. The correct method for filing your income tax return and reporting Virginia taxable income depends on your residency status. Following the brief definitions shown below, each residency status, with corresponding filing requirements, is discussed in detail.

Resident: A person who lives in Virginia, or maintains a place of abode here, for more than 183 days during the year, or who is a legal (domiciliary) resident of the Commonwealth is considered a Virginia resident for income tax purposes. Residents file Form 760.

Part-Year Resident: A person who moves into Virginia during the year with the intent of becoming a resident, or a person who moves out of Virginia during the year to become a resident of another state, is a part-year resident for income tax purposes. Part-year residents generally file Form 760PY. (more)

Nonresident: A person who is not a resident or part-year resident, but who receives taxable income from Virginia sources is a nonresident for income tax purposes. Nonresidents file Form 763. (more, including special filing situations)

Resident Military Personnel

Members of the armed forces on active duty are taxed on their military pay only by their legal states of residence (home of record). If your legal state of residence was Virginia when you entered the armed forces, and you have not legally changed your residency to another state, you are still a Virginia resident, although you may be stationed elsewhere. Report all of your income on your Virginia return, Form 760, whether it was received from within or outside of Virginia. If your spouse is also a Virginia resident, you should file a joint return, using Filing Status 2.

Nonresident Military Personnel

Members of the armed forces who are not Virginia residents are not subject to Virginia income tax on their military pay, or on interest received from accounts held in Virginia banks. However, if you have other income from Virginia sources, such as a part-time job, or a business or trade conducted in Virginia, you are subject to tax on this income. You should report the income on a nonresident return, Form 763. Your residency status as a member of the military does not extend to your spouse or dependents. Non-military spouses and dependents living in Virginia are subject to the same residency and filing requirements as all other individuals.

Spouses and dependents of military personnel are subject to the same residency and filing requirements as all other individuals who are not members of the armed forces. For more information, see Who Must File and Residency above.

Deduction for Military Basic Pay

Military personnel stationed inside or outside Virginia may be eligible to subtract up to $15,000 of military basic pay received during the taxable year, provided they are on extended active duty for more than 90 days. For every $1.00 of income over $15,000, the maximum subtraction is reduced by $1.00. For example, if your basic pay is $16,000, you are entitled to deduct only $14,000. You are not eligible for the subtraction if your military basic pay is $30,000 or more.

Exemption for Virginia National Guard Income

The wages or salaries received by any person for active and inactive service in the National Guard of the Commonwealth of Virginia, not to exceed the amount of income derived from thirty-nine calendar days of such service or $3,000, whichever amount is less. However, only those persons in the ranks of 03 (Captain) and below shall be entitled to the deductions specified herein.

If a National Guard service member has been in an active duty status for 90 consecutive days or more during the taxable year, they may also qualify for the exemption for the first $15,000 of basic military pay. However, if a National Guard service member has been on active duty status for less than 90 consecutive days of the taxable year, they will not qualify for the exemption for the first $15,000 of basic military pay. If their extended active duty status rolls into the following taxable year and lasts for more than 90 consecutive days, they will qualify for the exemption on the following year income tax return, but only for the pay earned in that taxable period.

Subtraction for Combat and Hazardous Duty Pay

Military personnel on active duty service in a combat zone or a qualified hazardous duty area may subtract their combat or hazardous duty pay, to the extent that the pay was included in federal adjusted gross income and not otherwise subtracted, deducted or exempted. Any military pay allowances earned while serving by order of the President of the United States with the consent of Congress in a combat zone or qualified hazardous duty area treated as a combat zone for federal tax purposes pursuant to Section 112 of the Internal Revenue Code qualify for the subtraction.

Claiming More Than One Subtraction

It is possible to meet qualifications for and claim more than one military subtraction; however, a double exclusion of military income is prohibited for military subtractions. For example, the income used to calculate the $15,000 Military Subtraction could not be used to calculate the National Guard Subtraction and vice versa.

Filing and Payment Extensions

If you are stationed outside the United States or Puerto Rico on the date your return is due (May 1), the due date for filing and payment of your Virginia income tax is automatically extended to July 1. When filing under this provision, be sure to write "Overseas Rule" at the top of your return, and attach a statement explaining that you were out of the country. For general information on extensions, see When to File above.

Members of the Military

Members of the armed forces on active duty are taxed only in their legal states of residence. If you are a member of the armed forces, but you are not a Virginia resident, you are not subject to Virginia income tax on your active duty military pay, even though you are stationed in Virginia. You are liable to pay Virginia income tax as a nonresident on income you earn from any business, trade, profession or occupation in Virginia. To report this income, file Form 763.

The tax exemption provided for members of the armed forces does not apply to spouses and other family members. If you are a nonresident and your spouse is a resident of Virginia, you may not file a joint Virginia return, even though you may have filed a joint federal return. Spouses of military personnel are subject to the same residency and filing requirements as all other individuals who are not members of the armed forces. (See the information under VIRGINIA RESIDENTS, PART-YEAR RESIDENTS ) and NONRESIDENTS)