Virginia non-resident return - assistance needed

[FEDUKE404]

Long-term client (MFJ, two dependents) will be required to file a non-resident Virginia income tax return (Form 763) due to 2014 sale of inherited land located in Virginia.

The land belonged to the spouse. There is no other Virginia income to be reported on Form 763.

As best I read things, Virginia will *REQUIRE* a married filing separately return to be filed with the Commonwealth. The clients' return is reasonably complicated, to include investment income, retirement income, itemized deductions (also medical), and college education credit. Although I do have all income marked as H/W/J, there still would be a bunch of work required to come up with a "MFS" return just to satisfy Virginia. Who gets the dependent(s)? How do you split "joint" deductions?

Along a similar line, how does efiling work in a case like this? The federal and resident state returns will definitely be MFJ, so would Virginia "piggyback" a non-existent MFS tax return prepared only for Virginia calculation purposes?

Any suggestions would be appreciated. (Life would be must simpler if husband had some Virginia income. . .)

Thanks.

FE


RELEVANT BOILERPLATE FROM VIRGINIA INSTRUCTIONS:

Filing Status 2 - Married, Filing a Joint Return: You and your spouse may file a joint return if: (1) you filed a joint federal return; or (2) neither of you was required to file a federal income tax return; and (3) both spouses had income from Virginia sources. If only one spouse had income from Virginia sources, a separate return must be filed under Status 4.

Filing Status 4 - Married, Filing a Separate Return: A separate Virginia return MUST be filed if: (1) both husband and wife are nonresidents and have income from Virginia sources, but do not choose to file a joint return under Status 2; or (2) both husband and wife are nonresidents and both had income, but only one had income from Virginia sources; or (3) only one spouse is a nonresident and the couple cannot elect to file a joint resident return.

When using Filing Status 4, complete your tax return as follows: (1) Compute your federal adjusted gross income as though you had filed separately on your federal return; (2) claim only the personal and dependent exemptions, itemized deductions (if claimed on your federal return), and child and dependent care expense amounts that you could claim if you had filed a separate federal return. If one spouse claimed itemized deductions, the other spouse must also. (3) Be sure to provide your spouse's name and social security number in the spaces included on the return for that information.

[Gretel]

Long-term client (MFJ, two dependents)

Along a similar line, how does efiling work in a case like this? The federal and resident state returns will definitely be MFJ, so would Virginia "piggyback" a non-existent MFS tax return prepared only for Virginia calculation purposes?
.

I'll answer this part since I recently had to look up if a VA return can be e-filed by itself, and yes, it can.

[FEDUKE404]

State only efiling

I'll answer this part since I recently had to look up if a VA return can be e-filed by itself, and yes, it can.

I'm fully aware a VA return can be efiled by itself.

But my question is, if the VA return is working from an underlying MFS (federal) return that only exists in the computer (not with the IRS nor with the resident state), how does the VA return correlate the (theoretical) numbers sent to Richmond versus the (correct) numbers sent to the IRS? I assume some kind of information exchange and/or cross-matching occurs between federal and state.

Another issue on efiling a "state only" return: That is often a helpful (partial) solution when an issue of identity theft has occurred. The federal returns will still crash and burn when efiling is attempted, but the state efiled return will often process without any problems. Such an approach helps a bit by NOT having to paper-file a state return under those circumstances.

FE

[Burke]

You can do a federal and state return using MFS status showing only the spouse's income. Then create the e-file (my software requires you to use both since the state will drag info from the federal), but do not e-file the federal. De-couple the state return from the MEF file, and then just e-file the state. That should work. Or if your software allows you to create a state only return, that can be e-filed as a separate document. You have to attach the actual federal tax return which is filed as a pdf if you do that, and possibly the other state tax return as well if the income is taxed there too. If a cross-state tax credit is involved, don't forget Form VA OSC.

[FEDUKE404]

What about deductions et al ?

You can do a federal and state return using MFS status showing only the spouse's income. Then create the e-file (my software requires you to use both since the state will drag info from the federal), but do not e-file the federal. De-couple the state return from the MEF file, and then just e-file the state. That should work. Or if your software allows you to create a state only return, that can be e-filed as a separate document. You have to attach the actual federal tax return which is filed as a pdf if you do that, and possibly the other state tax return as well if the income is taxed there too. If a cross-state tax credit is involved, don't forget Form VA OSC.

Aside from the filing procedure, what do you suggest for "splitting" the dependents, Schedule A entries, education credits, etc. ??

It's a piece of cake to split the "income" as it is already coded H/W/J, but the rest could get interesting.

One approach: Since the husband will *NOT* (apparently) file a VA-MFS-NR return, give EVERYTHING to the wife? ? Not sure that dog would hunt too well. . .

Time to watch some basketball games. . .

FE

[Burke]

No, that won't do. Pro-rating by income is acceptable, except for the dependents of course. You cannot take a half of one. In the old days, when we filed a split, joint return for VA showing each spouses' income in a separate column, we were allowed to apportion all deductions and exemptions (except for the other spouse) in any way we wished. But this is not two MFS VA returns. So I would pro-rate. There are no education credits in VA. Only if you use Tuition Deduction will it affect the 763. It follows the person and/or claimed dependent who has the expense. Also, if you pro-rate Sche A, you must use only the spouse's state tax paid for whom you are doing the return. Actual expenses paid is also an acceptable method.

[FEDUKE404]

Finalizing Virginia Form 763

No, that won't do. Pro-rating by income is acceptable, except for the dependents of course. You cannot take a half of one. In the old days, when we filed a split, joint return for VA showing each spouses' income in a separate column, we were allowed to apportion all deductions and exemptions (except for the other spouse) in any way we wished. But this is not two MFS VA returns. So I would pro-rate. There are no education credits in VA. Only if you use Tuition Deduction will it affect the 763. It follows the person and/or claimed dependent who has the expense. Also, if you pro-rate Sche A, you must use only the spouse's state tax paid for whom you are doing the return. Actual expenses paid is also an acceptable method.

Burke -

What a mess. I think I've spent more time doing the "dummy" MFS return for the spouse for VA than I did for the "real" MFJ return for IRS/NC. There were three brokerage statements to dig through - yes, that would be a his and a hers and a joint.

Anyway, I'm now content with the income issues. I still need to determine the Sch A numbers, which will have to be prorated. The best method I can come up with for that is to compare the spouse's "theoretical" AGI to the couple's "real" AGI as shown on the joint federal return. Will that fly?? FWIW: Spouse turns out to be 48%, which is seriously close to just taking half for the spouse.

As for the only dependent (high school student living at home), with these circumstances is it just a toss up as to who gets the dependent for the dummy MFS return? Since there is no Virginia return for the taxpayer, I see no reason NOT to show the dependent on the spouse's Virginia Form 763.

Thanks for your continuing input. It still bugs me why Virginia puts us tax folks through such a wringer. A simple MFJ Virginia Form 763 would simplify things greatly!!

FE

[Burke]

All along I have been thinking about a VA resident return where the spouse is filing separate (as if one lived here and the other spouse in another state.) After re-reading your OP about the circumstances, I see no reason why you cannot file a non-resident 763 MFJ return and simply apportion the income earned in VA vs the income earned in the other state. It's on Page 2. See instructions for itemized deductions on page 11 of 763 instructions if your software does not do this automatically. It should. Then attach a copy of the federal return. And if the income was taxed in the other state as well, Form VA OSC. (If that is the case, you have to attach the other state's return as well.) It appears neither spouse was a resident of VA at all.

[FEDUKE404]

MFS seems to be a requirement

All along I have been thinking about a VA resident return where the spouse is filing separate (as if one lived here and the other spouse in another state.) After re-reading your OP about the circumstances, I see no reason why you cannot file a non-resident 763 MFJ return and simply apportion the income earned in VA vs the income earned in the other state. It's on Page 2. See instructions for itemized deductions on page 11 of 763 instructions if your software does not do this automatically. It should. Then attach a copy of the federal return. And if the income was taxed in the other state as well, Form VA OSC. (If that is the case, you have to attach the other state's return as well.) It appears neither spouse was a resident of VA at all.

Sadly, I don't think MFJ is allowed for Virginia as taxpayer had no VA-source income and spouse did.

Rest assured, if I could have prepared a MFJ VA non-resident return, this conversation would have ended a long time ago!

If you think there is a way to file MFJ for VA, instead of MFS for spouse only for VA, I will be quite glad to be proven wrong! (see below)

FE


From page 8 of VA instructions for Form 763

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.

Married, Filing Separate Returns (Filing Status 4)
A separate return must be filed if one of the following applies:
• both spouses are nonresidents and both have income from Virginia sources, but do not elect to file jointly;
• both spouses 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 have equal income and one child, only one spouse may claim that child.

[turnerlj]

First, Virginia requires the taxpayer with the Virginia income to be listed as primary on the federal return. Next, when entering the information on the federal designate T/S for all input. Go to the VA return, mark "both have income, taxpayer only one with VA income".

[FEDUKE404]

Can you do that ?

First, Virginia requires the taxpayer with the Virginia income to be listed as primary on the federal return. Next, when entering the information on the federal designate T/S for all input. Go to the VA return, mark "both have income, taxpayer only one with VA income".

Clients have been filing MFJ (NC residents) for well over 30 years, with husband as primary and spouse as secondary. I'm not about to change that, just to suit VA which arrived on the scene with a required non-resident return for 2013.

As for marking info for spouse on Virginia return (where did you find that referenced statement??), for Box 2 of Form 763 ("both must have Virginia income") that does not apply, and for Box 3 of Form 763 ("spouse has no income from any source") that also does not apply. Box 4 (married filing separate returns) thus wins the lottery.

I've now worked my way through a dummy MFS Form 1040 from which the VA Form 763 will draw its information. Taxpayers will otherwise file a previously-prepared MFJ Form 1040 and NC (full-year resident) return. The VA Form 763 uses a different data base for the MFS-altered numbers.

FWIW: VA got $6 more in taxes by filing spouse as MFS versus what tax on VA income would have been had MFJ been allowed. What a joke!!

FE

[Burke]

Sorry, I just haven't had time to get back to you on this. I never heard the information the other poster provided. The way you did it is the only way I was able to do it and have the software operate properly. (It's a lot easier if you are just doing a paper return.) I know, its stupid. The four filing status's are the ones we used to use on all returns until they changed it for the 760CG. If you filed MFJ on the federal, you could use either MFJ or MFJ (#4) Filing Separate option. Separating the income always worked out better for the TP, unless one had no income at all, or it was less than the exemption amount for themselves.