State tax domicile should be a big deal for military

| January 20, 2017 | 0 Comments

Legal Assistance Office
Staff Judge Advocate

SCHOFIELD BARRACKS — Under the Servicemembers Civil Relief Act, service members do not lose their state tax domicile merely by joining the service and moving from state to state, or abroad, on military orders.

This statement means that you do not have to pay state income taxes on your military income in every state you move to on military orders. However, due to budget cuts, nationwide, many states aggressively audit state tax domicile issues for service members.

Readying for tax season.

Readying for tax season.

Which state is your domicile?

Domicile is established by being physically present in a state and forming an intent to remain for the indefinite future. Intent to remain is established by the following contacts:

  • Where you vote,
  • Where you own property,
  • Where you pay state taxes,
  • Where you hold professional licenses,
  • Where you register vehicles,
  • Where you hold a driver’s license,
  • Where you accept tax breaks for a declaration of homestead, or
  • Where you have indicated your last will and testament should be probated.

A determination of domicile is fact specific, but the more contacts you can establish, the stronger your case. Service members should be aware that in order to keep a particular state tax domicile, you must be able to prove at any given time that you intend to return to that state as soon as your military obligations are completed.

There are several rules regarding domicile. First, everyone has a domicile. Second, a state remains your domicile until you take steps to change your domicile. Third, your military “home of record” is not necessarily your domicile.

IRS logo color

IRS logo color

Merely purchasing a new home in a new state, or moving to a state under military orders, does not necessarily indicate that you have changed your domicile. However, if you do not actively keep your contacts in a claimed state updated, such as your registration to vote or your driver’s license, and you develop new contacts in the state you are stationed in, there could be serious tax implications for you and your family.

An example scenario

You were born and raised in Texas. You joined the Army in Texas in 1994. Texas is both your domicile and military home of record. Texas has no income tax.

In 1995, you make a permanent change of station, or PCS, move to your first duty station in Alabama. While stationed there, in 1995, you bought a home, registered to vote, registered your car, and got an Alabama driver’s license. To a third party, it appears you intend to make Alabama your domicile.

In 1997, you receive a notice from the Alabama Department of Taxation challenging your Texas Domicile and not paying Alabama state income tax. Alabama Department of Taxation’s allegation is that you are an Alabama resident now, and that you owe a year’s worth of back taxes.

While you did not intentionally change your state tax domicile, by the choices you made, Alabama is claiming you are now domiciled in Alabama and are required to pay Alabama state taxes. It is now your burden to prove that Texas remains your domicile and is where you plan to make your permanent home.

Other factors to remember

The SCRA only allows you to escape paying state income taxes on military income. If you have a second job, or business income, outside of the military, you will have to pay non-resident state income taxes on that income in the state you are stationed. Additionally, if you are self-employed, received a 1099-MISC with box 7 non-employee compensation, or own a business, you will have to pay the General Excise Tax (GET) or Use Tax.

There are free steps you can, and should take, to protect your state tax domicile. You are advised to vote, exercise your rights and claim the benefits of legal residence only in the state where you intend your domicile to be, unless you intend to abandon your old legal residence and establish a new one.

Voting is considered the most important indicator of intent in most states. While voting absentee ballot may be inconvenient, you should make the effort if your domicile is not the state in which you are stationed.


Point of Contact

If you have any questions concerning state tax domicile, call the Legal Assistance Office for an appointment at (808) 655-8607.

Legal Assistance is located at 278 Aleshire Ave., Bldg. 2037, Schofield Barracks.

Soldiers, service and family members from all branches, posts and bases are welcome to make an appointment.

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