Virginia Residency and Income Tax Requirements

Note: There have been tax updates impacting Virginia businesses and individual taxpayers due to COVID-19.

Considering a move out of Virginia? Learn about the Virginia Department of Taxation’s Domiciliary and Residential Requirements.

By Terry Barrett, CPA, Tax Senior Manager | State and Local Tax Team Leader

Virginia Residency and Income Tax Requirements

Considering retirement? Thinking Florida or another state that has no income tax? Those tax savings certainly could stretch your retirement income. Considering selling a business? Or, possibly you are considering relocating to another state or country for work?  Certainly saving state income tax would be helpful. While the logistics of the move may be challenging enough, defending that move as permanent enough to eliminate potential lingering “home” state income tax requirements may be an even greater challenge without careful planning throughout the process.

States are reluctant to readily accept that a taxpayer has moved away, particularly when there may seem to be substantial ties to the former home state.  If a taxpayer stops filing an income tax return after a  history of filing or if information received from the Internal Revenue Service or the Department of Motor Vehicles suggests a taxpayer may still have ties to the former home state, assessments, notices or requests for information will be sent to a taxpayer.

The type of information a state requires to evidence a change in domicile varies based upon the state a taxpayer is seeking to leave.  Virginia is particularly diligent in pursuing non-filing taxpayers. If the Department of Taxation (the “Department”) determines that sufficient connections still exist in the Commonwealth, it will often rule that tax filing/payment requirements are met. The burden of proof is on the taxpayer to prove he or she has abandoned his or her Virginia domicile and established a new domicile elsewhere.

This article is focused on Virginia and is intended to provide information on Virginia’s tax policy with respect to income tax responsibilities of residents.  The rules may be different in other states so if you are considering a move from a state other than Virginia, we recommend you look into your current “home” state rules. The following, however, should provide some guidance.

Individual State Income Tax Facts                

Individuals are subject to income tax in 43 states and the District of Columbia. In 41 states and the District, the tax is generally based on all sources of income; in two states, Tennessee and New Hampshire, the tax is limited to dividend and interest income. Tennessee’s tax, however, is scheduled to be repealed for taxable years beginning on and after January 1, 2021.  The seven states that have no state-level income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. According to U.S. Census Bureau, in 2016 individual income taxes accounted for 37 percent of state tax collections. In Virginia, though, for Fiscal Year 2018, individual income tax collections (net of refunds) were approximately 14.1 billion dollars and accounted for over 73 percent of the Department of Taxation’s General Fund Revenues.[i]  Thus, maintaining the stream of individual income tax revenues to the states, and particularly Virginia, is critical to funding state operations and initiatives.

Residents Required to File Virginia Tax Returns — Domiciliary v. Actual Resident

Generally

In Virginia, for individual income tax purposes there are two classes of residents, a domiciliary resident and an actual resident. A domiciliary resident is a person who has a permanent place of residence in the state to which he or she intends to return even though he or she may reside elsewhere.  An actual resident of Virginia is a person who for an aggregate of more than 183 days of the taxable year lives in Virginia.  A person may be both, either, or neither, depending upon his unique set of circumstances.  In addition, a person may view his or her own situation differently than does the Department.

It is possible for a person to be a resident of more than one state for income tax purposes but a person has only one domicile (“home”) or legal residence. A Virginia domiciliary resident working in another state or country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. This means that as a domiciliary resident all of the taxpayer’s income is taxed by Virginia. He or she may have an income tax filing requirement in the state or country where working as well. Similarly, a person who is not a domiciliary resident of Virginia but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation. That person may also have an income tax filing requirement in his or her state of domicile.

Most domiciliary residents actually live in Virginia yet actual presence in the state is not required. Any person who has not moved from Virginia with the intent to permanently live outside Virginia is still considered a domiciliary resident. Thus, once domicile is established it continues until the person moves to a new location with the intention of making his fixed and permanent home at that new location.

Change is a Two-Step Process

In Virginia, a simple declaration of a change in domicile is insufficient to relieve a domiciliary resident of Virginia income tax requirements.  Changing one’s domicile is in fact a two-step process.

Step 1
First, the person must intend to abandon his Virginia domicile and have no intention of returning to the Commonwealth.

Step 2
Second, that person must acquire a new domicile where he or she is physically present with the intention to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change. Thus, as noted above careful advanced planning for and documentation of the facts supporting a change in domicile, is critical. An abrupt decision to change one’s domicile from Virginia to say Florida may have unintended consequences if the person must return to Virginia to spend a significant amount of time in selling a home, making financial arrangements for family members, attending to winding-down business obligations, etc. That time spent in Virginia counts towards the 183 threshold for being an actual resident. While a change in domicile may have occurred (if established quickly in Florida) or been intended, the person may be still be an actual resident given the time spent in the state during the tax year.

Equally critical to advance planning is a comprehensive response to Department notices and requests for information.  Inadequate, incomplete or total disregard for Department inquiries typically lead to conclusions that a taxpayer intended to remain indefinitely in Virginia and is liable for Virginia income tax.

What Determines Domicile

The Department looks at several factors in determining a person’s domicile. Virginia law, specifically, Code of Virginia § 58.1-302 explains:

In determining domicile, consideration may be given to the individual’s expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, business pursuits, employment, income sources, residence for federal income tax purposes, marital status, residence of parents, spouse and children, if any, leasehold, sites of personal and real property owned by the applicant, motor vehicle and other personal property registration, residence for purposes of voting as proven by registration to vote, if any, and such other factors as may reasonably be deemed necessary to determine the person’s domicile.

Virginia Regulation 23 VAC 10-110-30 includes others factors that are used in determining domicile such as location of savings and checking accounts, membership in clubs and civic groups, charitable contributions, location of schools attended by children, length of time of residence, place of birth and marriage, residence of family, reason for abandoning or acquiring domicile, and, in the case of a minor or married person, domicile of parents, husband, or wife and/or children.

No single factor is dispositive in determining domicile; rather the factors are examined by the Department collectively to determine if the intent to acquire or abandon Virginia domicile exists.  It is noteworthy, however, that the fact that a person who has moved outside of  Virginia yet returns to the state to live within six months constitutes prima facie evidence that no intent to abandon Virginia domicile existed.

There are specific rules for members of Congress and military personnel.

Members of Congress

Members of Congress who retain their domicile in their home states are not considered residents, actual or domiciliary, of Virginia.  They are subject to Virginia income tax as nonresidents only on income received from Virginia sources, thus, if there is no Virginia-source income, there is no Virginia return filing requirement for them.  Their staff members who reside in Virginia for more than 183 days during the taxable year on the other hand are considered actual residents of Virginia and subject to Virginia income taxation even though they may maintain their domicile in another state.

Military Service Members

The federal Service members Civil Relief Act (50 U.S.C. § 3901 et seq.) provides that military service personnel do not abandon their legal domicile solely by complying with military orders that require them to live in a different state or country. The Act, however, does not preclude the possibility that military personnel may acquire a new legal domicile in the state where they are stationed and thus become subject to income taxation in that state, to the extent there is an abandonment of the domicile in the old state and acquisition of domicile in the new state.

In general, the Department does not seek to tax active duty military service personnel provided the member maintains sufficient connections with another state to indicate the intent to maintain domicile there.  These connections include the filing of a State of Legal Residence Certificate (Dept. of Defense Form 2058), obtaining a driver’s license, registering to vote and voting in an election, registering an automobile, and exercising other benefits or obligations of a particular state.  Provided the military service member maintains these connections, they are considered a resident of that other state even though they may live, work, and establish a permanent place of abode in Virginia.  However, they are subject to Virginia income tax as a nonresident on income earned from any business, trade or occupation in Virginia.

The Department uses a Domicile Questionnaire or general information inquiries to assist in determining residency status.  The questionnaire or information requests, or estimated assessments in some cases are sent to taxpayers when the Department receives information from the Internal Revenue Service (IRS) or other sources that suggests a taxpayer who did not file a Virginia individual income return possibly should have. The IRS routinely notifies the Department when tax or financial documents were sent to a taxpayer at a Virginia address. The Internal Revenue Code authorizes the Department to obtain information from the IRS that will help in determining a resident’s tax liabilities when the resident does not file a proper Virginia return.

General information (name, social security numbers, current address) as well as specific information regarding the following may be requested:  date and place of birth; address of parents; marital status and states of residency prior to marriage; dates and addresses where the taxpayer (and spouse/children) lived in and outside of Virginia; homes owned in and outside of Virginia; children attending “public free schools” in Virginia; bank accounts; voter registration; motor vehicle registrations; driver’s licenses; employment; payment of state income and local property taxes; etc.  Typically a taxpayer is also asked to provide information regarding their state of claimed legal residency and the connections, interests or business he or she may have in that state. This is where a taxpayer has the opportunity to provide any and all other information to explain and document connections in the new state of residency.

In the event a taxpayer receives an estimated assessment, the above information should be provided to document Virginia domicile has been abandoned and no tax liabilities are due. The assessment should not be ignored.

Determining Domiciles

In determining domiciles, the Department looks to the individual’s expressed intent, conduct, and all attending circumstances.  A person’s true intention must be determined based upon the specifics of each case.  Although the Department acknowledges that a change of domicile occurs as part of a process in which no single factor is dispositive, there are a few key factors it considers strong indicators of maintaining a Virginia domicile.  These include, but are not limited to:

1. A Virginia driver’s license issued to the taxpayer. Virginia law provides that no driver’s license shall be issued to a person who is not a Virginia resident. Thus, obtaining or renewing a Virginia driver’s license after one has moved away is a strong indicator that a person has not abandoned his Virginia domicile.  However, the Department has also found that an individual may successfully establish a domicile outside Virginia even if they retain a Virginia driver’s license.
2. Maintaining a Virginia residence even though a residence may have been rented or purchased in another state.
3. Maintaining voter registration in Virginia and particularly actually voting in Virginia state elections. The qualifications necessary to vote in Virginia are set forth in the Constitution of Virginia and require that a person registering to vote must be domiciled in Virginia and have his or her place of abode in Virginia.
4. Having motor vehicles registered in the state.
5. Paying in-state tuition for children attending Virginia colleges.

The Department routinely points out in the various ruling letters/responses to appeals issued every year that maintaining and particularly renewing a Virginia driver’s license, registering to vote (or not changing voter registrations), and paying in-state tuition all by law are allowed only for Virginia residents.  Where a taxpayer’s fact pattern includes one or more of these facts, the determinations generally are skewed towards the conclusion of a domiciliary resident.  The Department is quick to point out that in signing the various applications (for voting and in-state tuition), a taxpayer is certifying they are a domiciliary resident of Virginia under the penalty of perjury, and given the possible penalties against a taxpayer, such actions display an intent that a taxpayer considers himself a domiciliary resident of Virginia.

Summary of Select Department Rulings

The Department has issued hundreds of letters over the years in response to taxpayers’ appeals of Department findings of domicile and Virginia taxation of income.  Several of these are summarized below.  It is important to note that key but not all facts are explained.

Lingering Connections with Virginia

• Individual accepted a position in Country A and moved there with his spouse in Feb. 2013.  A personal residence was purchased in a state other than Virginia in September 2013 and the taxpayer intended to make it his permanent home if he chose not to remain in Country A.  The house was not completed by January 2015 when he decided to leave Country A, so he returned to Virginia.  While in Country A, the taxpayer maintained connections with Virginia including owning a personal residence, being a registered voter, having a Virginia driver’s license, and having several vehicles in the state.  The Department concluded the taxpayer had not proven he intended to abandon his Virginia domicile. PD 14-13 (01/30/2014)
• Husband accepted employment in another state and leased a residence there. He continued to own a home in Virginia where his wife lived. The husband maintained his Virginia driver’s license and voter registration and had three vehicles registered in his name in Virginia. While the Department pointed out that the taxpayer performed two actions consistent with changing his domicile to the other state (employment and leasing of a residence), he performed numerous actions that were consistent with maintaining a Virginia domicile and found him liable for Virginia income tax for the years at issue. PD 08-69 (05/22/2008)

Living in an RV

• Husband obtained employment in State A and worked there for 1 year. He lived in an RV in that other state and had close family members nearby. His spouse continued to live in Virginia but earned no income.  While the husband filed a tax return in State A (based upon a W-2 with his address in that state), he filed in Virginia jointly with his spouse as part-year resident.  The Department determined that given the ownership of a personal residence in Virginia, as well as a number of vehicles registered in the state, a Virginia driver’s license and voter’s registration, and the registration of the RV in the state, the taxpayer was a domiciliary resident in Virginia.  While the taxpayer argued that IRS defines a home as including a recreational vehicle, the Department did not agree and said that because recreational vehicles are readily moveable, it may be difficult for a taxpayer to provide that he had the requisite intent to establish domicile in a given place where the vehicle was located. PD 18-180 (10/24/2018)

Involuntary Resident Due to Medical Issues

• An individual, a lifelong resident of another state, was in Virginia visiting family when she had medical problems that resulted in her being placed in a Virginia retirement and then nursing home. The Department ruled that while the individual did not intend to become a domiciliary resident, because there was involuntary residency in Virginia for more than 183 days during 1996, 1997, and 1998 taxable years, this did constitute actual residency for income tax purposes, and tax was due.  Tax, interest, and penalties were assessed. PD 00-68 (5/10/2000)

Severance Pay

• The issue in this case related to the proper classification of “pay” paid by a Virginia employer. Severance pay is considered Virginia source income to a nonresident individual when paid by a Virginia employer. A Virginia resident’s employment in the state was terminated. He signed a termination agreement that provided for a lump-sum severance payment and additional period payments. He later moved to another state to begin a new job. The former employer made the lump-sum payment and period payments to the taxpayer and withheld Virginia income tax. Some of this occurred after the taxpayer had moved to another state. The taxpayer contended that no Virginia tax was due on the payments because they were not severance payment but rather compensation for compliance with non-compete agreements. The Department agreed that the payments were not severance payments and thus were not taxable to Virginia. PD 05-36 (3/16/2005)

Inconsistent Information

• The taxpayer filed a part-year Virginia resident individual income tax return for 2013. The return was audited and the Department requested additional information. The information eventually provided by the taxpayer revealed several inconsistencies. The taxpayer claimed his only connection with Virginia was a condominium which he leased to another party and his parents’ residence. However, the Department investigated the taxpayer and learned about a business registered with the State Corporation Commission and a loss reported from the business on his 2013 federal income tax return. The Department also learned the taxpayer had a Virginia driver’s license and determined that the taxpayer’s connections to the other state were unclear. Accordingly, the Department upheld the finding the taxpayer was a domiciliary resident for the periods at issue and liable for the tax. PD 17-127 (6/29/2017)

Vacation Home (advertised in Southern Living magazine) and Other Connections to Virginia – Taxpayer Had No Intent to Establish Domicile But Did Through Actions

• In this case, a taxpayer claimed he was not a Virginia resident.  He was a resident of another state prior to moving abroad to work for international oil companies.  Documentation was provided including tax returns filed with foreign countries where he lived, letters from employers attesting to his work assignments, leases for apartments in foreign countries, foreign driver’s licenses and work permits, and other documentation identifying the Taxpayer’s locations for the years in question. However, the Department concluded that the documentation provided only showed that the Taxpayer spent the majority of each year outside of Virginia and explained that the law is very clear that a person may be domiciled in Virginia without being present in the state for a majority of the year.  The Department determined that because the taxpayer had established and maintained connections with Virginia he was a domiciliary resident of the state. The taxpayer had purchased a vacation home in Virginia; purchased and titled motor vehicles in the state; obtained a Virginia driver’s license (according to the taxpayer to facilitate obtaining rental cars while traveling in other states); registered to vote in Virginia; and indicated on in-state tuition applications that he paid or would be paying Virginia income tax.  It appears that while the taxpayer may not have intended to become a domiciliary resident of the state, his actions were viewed by the Department as doing just that. PD 02-149 (12/9/2002)

Couples Caught in the Middle

• A husband and wife maintained a residence in Virginia and in another state. Beginning in 2015, they began residing in the other state for more than 183 days per year and qualified for that state’s homestead exemption. The couple, however, renewed and maintained their Virginia driver’s licenses and had four vehicles registered in the state. They previously had registered to vote in and acquired identification cards for that other state. The couple was in the process of transferring the ownership of their Virginia residence to their son through a qualified personal residence trust and filed nonresident Virginia returns for the taxable years at issue, reporting all passive income derived from Virginia based pass-through entities as Virginia source income. The Department determined that the couple were Virginia domiciliary residents largely due to the fact that while performing actions consistent in establishing a domicile in the other state, they also performed actions consistent with maintaining their Virginia domicile, the most telling of which was maintaining and renewing their Virginia drivers’ licenses and having four vehicles registered in the state. While the couple argued that having the vehicles registered in the state served to reduce their costs of insurance, the Department concluded that the fact that a taxpayer seeks to gain the benefits of lower costs available to Virginia residents to be a strong intent of a taxpayer’s desire to be a domiciliary resident of Virginia. PD 10-249 (11/04/2010)
• A couple lived in Virginia. The husband accepted permanent employment in another state and moved/lived there beginning in July 2013.  He leased several personal residences but was laid off in August 2015 and returned to Virginia. While working in the other state, the husband had his W-2s sent to the state where he was living. The wife continued to live in Virginia in a personal residence, vehicles were registered in Virginia, third party information returns such as 1099s were mailed to the Virginia residence, and the husband maintained his Virginia driver’s license. The 2013 federal income tax return was filed with the Virginia address. The Department determined that the couple was liable for Virginia income tax for 2014 as the husband did not establish sufficient connections in the other state to indicate a change in domicile and thus failed to prove his intent to abandon his Virginia domicile. The Department noted that splitting time and connections between states raises doubts as to an individual’s true intentions. PD 18-177 (10/24/2018)

Military Service Members

• As explained above, the Department generally does not seek to tax active duty military service personnel provided the member maintains sufficient connections with another state to indicate the intent to maintain domicile there. However, the Department found otherwise. The taxpayers, a husband and wife, claimed exemption from Virginia income tax under the Service members Civil Relief Act because the husband was in the military and stationed in Virginia yet they both were domiciliary residents of another state. The Department found that the husband and wife were actually domiciled in Virginia.  While the husband was registered to vote in the other state he had not actually voted.  In addition, although the couple asserted they had a permanent address in the other state the Department was unable to verify any ownership of real property.  The husband obtained a Virginia driver’s license, registered his vehicles in the state, and rented a personal residence in Virginia following his retirement from military service. Virginia law exempts service members on active duty, their spouses, and dependent children residing in Virginia from the requirement to obtain a Virginia driver’s license when they have obtained licenses in their home state. Thus, the Department found that fact that the husband obtained a Virginia driver’s license was strong indicator of the couple’s intent to be domiciled in Virginia and found them liable for the tax years at issue. PD 18-142 (7/17/2018)

College Students

Generally, the Department finds that college students rarely establish domicile in the state where they attend college. College housing, whether a dormitory, apartment or otherwise, is generally viewed to not be a permanent place of abode and employment engaged in by college students generally viewed as temporary in nature.

• The taxpayer went to college in another state, paid that state’s tuition, and lived in a fraternity house. He was registered to vote there and completed an internship one year. He filed a part-year resident return for that year, 2007, in that other state reporting the income earned from the internship. Upon graduation from college in 2008 he accepted employment in the other state with the company for which he had interned.  The taxpayer, though, originally acquired a Virginia driver’s license in 2002 and renewed it in January 2006 and January 2011. The Department determined he was a domiciliary resident in 2007 and issued an assessment for individual income tax due that year.  Key to the Department’s ruling was the fact that the student had a Virginia driver’s license and renewed it while attending college in the other state, and continued to receive mail in Virginia. PD 11-101 (6/09/2011)

A Good Result

• A husband and wife moved to Virginia in 2000 when the husband was transferred to Virginia by his employer. In 2006, the husband was transferred back to the former state.  The husband rented an apartment and then purchased a home in that other state. He also obtained a driver’s license, registered a motor vehicle and registered to vote in that state.  His wife remained in Virginia so their children could finish their education.  The couple owned that Virginia home, had several motor vehicles registered in Virginia, and paid in-state tuition for their children. The Department determined the husband was a domiciliary resident of Virginia for 2006 and assessed additional tax.  Upon appeal by the taxpayers and additional review of the facts, the Department concluded the husband had established domicile in that other state and abandoned his Virginia domicile as the connections the husband had retained with Virginia were solely due to the fact that his wife remained in the state until the children completed their education. PD 09-133 (9/08/2009)

Penalties for Noncompliance Can Be Significant

In addition to taxes for those periods in which the Department determines a taxpayer had domicile but failed to timely file a tax return, interest and penalties are assessed.  In some cases where a taxpayer does not provide any information or takes unreasonable positions the Department can and does assess fraud penalties. The fraud penalties are 100% of the tax due.

Keep in mind, though, if the Department issues an estimated assessment, taxpayers can file actual returns demonstrating a lower tax liability, if applicable.  Interest and penalties, however, will still generally be assessed but will be lower than with the estimated assessment as they are based upon the tax due.

The Take-Aways

• Plan in advance when moving to another state with the intention of severing Virginia income tax ties.
• Get a driver’s license in the new state (and do not renew a Virginia’s driver’s license), register to vote (and actually vote), sell the Virginia home or at least buy a more expensive home in the new state, move the family (and do not pay in-state tuition in Virginia after the move), and don’t forget to take the family pet.
• If you are contacted by the Department for information, respond in a timely fashion.
• Remember that even if you move away, you may still have Virginia tax requirements as a nonresident if you have Virginia source income. Further, for the year of the move/change in domicile, you likely will have part-year filing requirements.
• Keep track of your days spent in Virginia vs outside the state to be sure you do not exceed 183 days in the state. There are various apps available to help with this.

If you need help with proactive planning or defending a change in domicile with the Department, please reach out to your Keiter advisor or contact us | 804.747.0000. We are here to help.

[i] Annual Report, Fiscal Year 2018 – Virginia Department of Taxation

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