Virginia Credit for Taxes Paid to Another State: How It Works
Learn how Virginia's credit for taxes paid to another state works, including eligibility, calculations, and filing requirements to avoid double taxation.
Virginia residents earning income in another state may face taxation from both Virginia and that state. To prevent double taxation, Virginia offers a credit for taxes paid to another state, reducing tax liability for eligible taxpayers. This ensures individuals are not taxed twice on the same income.
Determining Residency Status
Virginia classifies taxpayers as residents, part-year residents, or nonresidents, which determines their eligibility for the credit. A resident is someone who maintains a legal domicile in Virginia or spends more than 183 days in the state during the tax year. This includes individuals temporarily living elsewhere but intending to return, such as military personnel and students attending out-of-state universities.
Part-year residents are taxed on all income earned while a Virginia resident and only on Virginia-sourced income for the portion of the year they were not residents. The credit applies only to income earned while they were Virginia residents.
Nonresidents generally do not qualify unless they have Virginia-sourced income and must file a Virginia return. For individuals with ties to multiple states, Virginia determines tax obligations based on domicile and statutory residency rules. Domicile is established through intent and actions like voter registration, driver’s license issuance, and property ownership, while statutory residency is based on physical presence.
Out-of-State Income Eligibility
Virginia allows residents to claim a credit for taxes paid to another state, but only for income taxable in both Virginia and that state. Eligible income includes wages, self-employment earnings, rental income, and business profits earned outside Virginia.
The credit is only available if the other state imposes an income tax. If a Virginia resident earns income in a state without an individual income tax, such as Florida, Texas, or Tennessee, no credit can be claimed. Some states tax only specific types of income, such as business earnings, while exempting wages. In these cases, only the portion actually taxed qualifies.
Virginia does not have reciprocity agreements with other states. Residents working in states like Maryland or North Carolina must file a nonresident return and pay taxes there. Since these earnings are also subject to Virginia tax, they qualify for the credit. However, if the other state provides a full refund of taxes paid, Virginia does not allow a credit because no net tax liability exists.
Calculating the Virginia Credit
The credit is based on the tax actually owed and paid to the other state but cannot exceed what Virginia would have charged on that income.
Virginia’s tax rates range from 2% to 5.75% depending on income level. If the other state’s tax rate is higher, the credit is capped at the Virginia tax due on that income. For example, if a taxpayer earns $50,000 in another state with a 6% tax rate and pays $3,000 in taxes there, but Virginia’s tax on that income would have been $2,875, the credit is limited to $2,875. If the other state’s tax liability is lower, the credit is limited to the actual amount paid.
Taxpayers with income from multiple states must calculate the credit separately for each jurisdiction. If taxes were paid to both a state and a local government, only the portion paid to the state is eligible unless Virginia specifically allows a credit for local taxes in that jurisdiction. Some states, like New York, have city-level income taxes that do not qualify for this credit.
Filing Procedures and Forms
To claim the credit, taxpayers must complete Schedule OSC and attach it to their Virginia resident income tax return (Form 760). Schedule OSC requires a breakdown of out-of-state income, corresponding tax liabilities, and the credit calculation. Each state for which a credit is claimed must be listed separately. The figures reported must align with nonresident returns filed in the other states, as discrepancies may trigger an audit or delay processing.
Accuracy is essential when transferring amounts from out-of-state returns to Schedule OSC. Virginia tax authorities compare reported figures against tax data from other states, and inconsistencies may result in a denial of the credit. Taxpayers should use the actual tax paid rather than withholding amounts, as the credit is based on final tax liability after deductions, credits, and adjustments. Overstating the credit could lead to penalties or interest charges if Virginia issues a reassessment.
Required Documentation
Supporting documentation is necessary to substantiate the credit. Without proper records, the Virginia Department of Taxation may deny the credit or request additional verification, delaying processing and potentially leading to penalties or interest.
A copy of the nonresident state tax return is required to verify the amount of tax paid. This must be the final return as filed with the other state, not a draft or estimate. Taxpayers should also include proof of tax payment, such as a canceled check, electronic payment receipt, or state-issued tax transcript. If the other state provides a tax credit or refund that reduces the final tax burden, Virginia will only allow a credit for the net amount paid.
Wage earners should attach a copy of their W-2, particularly if they worked in multiple states. The W-2 provides a breakdown of state income tax withholding, which can help reconcile amounts reported on the nonresident return. Self-employed individuals and business owners should retain copies of state K-1 forms, 1099s, or other income statements detailing earnings sourced to the other state. Proper documentation ensures the credit is accurately calculated and minimizes the risk of an audit.
Potential Impact on Liability
Claiming the credit can reduce a taxpayer’s Virginia income tax liability, but the overall impact depends on tax rates, deductions, and other credits. In some cases, the credit may eliminate Virginia tax on out-of-state income entirely, while in others, taxpayers may still owe a balance if the other state’s tax rate is lower than Virginia’s.
For those earning substantial income in high-tax states like California or New York, the credit provides significant relief, as these states impose higher rates than Virginia’s maximum of 5.75%. However, if a taxpayer earns income in a state with a lower rate, such as Pennsylvania’s flat 3.07%, the Virginia credit will be limited, and they may still owe additional tax. This is particularly relevant for remote workers and business owners operating in multiple states, who must carefully plan their tax obligations.