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Ok to all my Virginia cohorts. I have a TP that lived in MD all her life. Took a medical deduction on most of her MD returns due to Nursing home cost. TP recently moved to Virginia due to cost being cheaper here. After several years TP received a reimbursement from the INS company from expenses paid while in MD. This income was separately state on the 1040 as other reimbursements. This reimbursement was received while a Virginia resident but the expenses were never deducted on a Virginia return. TP filed a non-resident return to MD to pay the tax on this income. TP also took a deduction under Virginia adjustments to remove this income from Virginia tax. Can Virginia tax this as it was never used on the Virginia return as a deduction? Your thoughts

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I have never had this situation and I did no research, so don't take this as a definitive answer.  The money received was income in the year of reimbursement and at that time the TP was a VA resident so VA could claim it as taxable income since they begin with federal AGI.  If TP paid MD tax on this same income, they would be allowed the credit for taxes paid to another state on the VA return.

I can also argue for the way the return was done and taking it as an adjustment.  Or even that since VA and MD have reciprocal status, all of the income should have been reported on the Virginia return since that is now the state of residence even though it was taxable due to a deducted taken in MD. 

These kind of things are what make tax interesting.  Is VA contesting the adjustment?  If you take off the adjustment and put on the credit for tax paid to other state, how much tax difference does it make?  In other words, is this a fight worth fighting with VA?

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I agree with Gail. I would have not filed a Maryland return. To me the fact it was deducted there is irrelevant. The funds were constructively received by the taxpayer as a resident of Virginia and the only tax due would be Virginia state tax. Whether the Department of Taxation will raise an issue over this is an unknown. If they think they can squeeze an extra dime out of the taxpayer they will try. Sometime back I had to email my state Senator to get a small refund due on an amended return as I had not heard from them in some six months.:angry:   

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