Your state tax domicile may or may not change

| January 23, 2018 | 0 Comments

Sgt. Bikram Shrestha of the 1-30th Engineer Bde. works on a client’s tax return on Feb. 7, 2017, at the Schofield Barracks Tax Center. (Photo has been altered). (Photo by Karen Iwamoto, Oahu Publications)

Servicemembers Civil Relief Act governs actions

Verndal Lee
Legal Assistance Office

Do you know why your state tax domicile is a big deal?

Everyone, including service members, owes state income tax to their state tax domicile. Under the Servicemembers Civil Relief Act, or SCRA, service members do not lose their state tax domicile merely by joining the military and moving from state to state or abroad on military orders.

This means that service members do not have to pay state income taxes on their military income in every state they move to on military orders. Many states aggressively audit state tax domicile issues for service members.

Which state is your domicile?
You always have a domicile. An individual can only have one domicile at any point in time. An individual’s domicile remains unchanged until the individual affirmatively changes it.

Your military “home of record” means nothing in terms of domicile. Your home of record is used for determining travel and transportation allowances. Enlisted members may change their home of record at the time they sign a new enlistment contract. Officers may not change their home of record except to correct an error or after a break in service.

Your home of record may be your domicile only if it meets certain criteria.
Domicile is established by being physically present in a state with the simultaneous intent of making it your permanent home. Both parts of the test must be met.

Some indications that you intend to make a state your permanent home are registering to vote and voting (to include absentee voting); owning real estate; holding professional licenses, titling and registering your vehicles; holding a driver’s license; accepting tax breaks for a declaration of homestead; or indicating your last will and testament should be probated there.

A determination of domicile is fact specific, but the more contacts you can establish, the stronger your case is.

Service members should be aware that in order to keep a particular state tax domicile, they must be able to prove at any given time that they have lived in that state and intend to return to that state as soon as their military obligations are completed.

Example scenario
Franklin John Rock, Orville P. Snorkel, and Amos T. Halftrack were all born and raised in North Carolina. After graduating from high school, they all obtained jobs in North Carolina. They file and pay North Carolina income tax returns each year. They intend to make North Carolina their permanent home.

All three are on vacation in New York City on Sept. 11, 2001. Being extremely patriotic, they rushed to the nearest New York recruiting office and enlisted in the Army. New York is their “home of record.” North Carolina remains their domicile.

First duty station
After basic training, all three individuals are assigned to Fort Bragg, North Carolina. They continue to be registered to vote – and actually vote – in North Carolina. They all have North Carolina driver’s licenses. They all have motor vehicles titled, registered and licensed in North Carolina. Franklin Rock purchases a home in North Carolina. They file and pay North Carolina state income taxes. New York is their “home of record.” North Carolina remains their domicile.

Second duty station
All three Soldiers – now sergeants – make a permanent change of station, or PCS, move to Fort Hood, Texas. Texas has no income tax. They begin to hear stories of how they can simply fill out a DD form, call Texas “home” and Finance will stop deducting North Carolina income taxes from their paycheck.

Sgt. Rock could use the extra money; he still owns his North Carolina home, and the rental income does not cover his mortgage payments. He decides to take advantage of this “easy money” and completes the State of Legal Residence certificate. Rock sees an immediate increase in pay. However, he has no intent of making Texas his legal home and takes no other steps to establish Texas as his domicile.

Sgts. Snorkel and Halftrack decide to disregard the “opportunity” to have Finance stop deducting North Carolina income taxes.

Rock does not file North Carolina income tax returns for the three years he is stationed at Fort Hood. Snorkel and Halftrack continue to file, and pay, North Carolina income taxes.

Halftrack meets and marries Martha. Martha Halftrack is a native Texan whose ancestry traces back to the Alamo. At the time Martha met and married Sgt. Halftrack, she was a non-working college student. New York remains their “home of record.”

Despite Rock not paying North Carolina income taxes, he has no intent of making Texas his permanent home. North Carolina remains the domicile of all three Soldiers.

Third duty station
The sergeants receive PCS orders to Fort Polk, Louisiana. Snorkel meets and marries Louise Lugg, a native of New Orleans. Sgt. Snorkel falls in love with Louisiana. He and Louise purchase a home in Louisiana. Snorkel decides Louisiana is where he wants to be after he retires from the Army. He registers to vote in Louisiana. He obtains a Louisiana driver’s license. He titles and registers his vehicles in Louisiana. He completes the DD Form to stop North Carolina tax deductions, calling Louisiana home. Snorkel files and pays Louisiana income tax the entire time he is in Louisiana.

Sgt. Rock continues to not file and pay income tax in any state. Sgt. Halftrack continues to file and pay income tax to North Carolina.

New York remains their “home of record.” Snorkel’s domicile is now Louisiana. North Carolina remains the domicile for Halftrack and Rock.

Fourth duty station
Now staff sergeants, the three Soldiers receive PCS orders to Schofield Barracks, Hawaii. Rock decides he doesn’t want to move to Hawaii. He returns to North Carolina, finds a job and moves back into his home. Rock files and pays North Carolina income tax.

An auditor wonders why Rock has not been paying North Carolina income tax for the previous six years. Rock is unable to prove he intended to make Texas his permanent home; he actually returned to North Carolina. Rock receives a bill for six years of past due taxes.

Due to Hawaii’s high cost of living, Martha Halftrack and Louise Lugg Snorkel find jobs and work while their husbands are stationed in Hawaii.

Because of the Military Spouses Residency Relief Act, or MSRRA (a separate Information Paper), Louise Lugg Snorkel does not owe Hawaii income tax. (They share the same tax domicile: Louisiana.) The Snorkels must, however, continue to file and pay Louisiana income tax. Under Louisiana law, a portion of Snorkel’s military pay earned outside Louisiana is exempt from state income tax.

Martha Halftrack and her husband have two different domiciles: Texas and North Carolina. Martha is unable to claim protection under the MSRRA.

Other factors to remember
The SCRA only allows you to escape paying state income taxes on military income. It does not apply to income from a second job. It does not apply to business income.

Questions
If you have any questions, call the Legal Assistance Office for an appointment at 655-8607. The Legal Assistance Office is located at 278 Aleshire Ave., Bldg. 2037, Schofield Barracks.

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