Do you know your state tax residency for your family members?

| January 24, 2019 | 0 Comments

Verndal C.F. Lee
Legal Assistance Office

What state can tax a Family member? An analysis of the pertinent laws follows.

WHAT IS THE MILITARY SPOUSES RESIDENCY RELIEF ACT (MSRRA)? The MSRRA amends the Servicemembers Civil Relief Act (SCRA) to provide that the spouse of a service member does not lose or acquire a residence or domicile for purposes of taxation by reason of being absent or present in a tax jurisdiction of the United States solely to be with a service member in compliance with the service member’s military orders if the domicile of the SM and the spouse are the same. [See Information Paper, Your State Tax Domicile and the Servicemembers Civil Relief Act (SCRA)] This created a “same state rule”.

Veterans who are eligible for a refund for taxes paid on their disability severance payment can submit a 1040X Amended U.S. Individual Tax Return for their reimbursement. Army Lt. Col. David Dulaney, the executive director for the Armed Forces Tax Council, said the Defense Department has identified more than 130,000 veterans who may be eligible for the refund. )DoD photo by Lisa Ferdinando)

Service members and their families must understand many rules during the tax season. (DoD photo by Lisa Ferdinando)

APPLICATION AND EXPLANATION. Under the MSRRA, a state cannot tax incomed earned in that state by the military spouse if the military spouse and service member have established a common tax domicile outside the state and are present in the state solely due to the service member being assigned to that state.

WHAT IS the Veterans Benefits and Transition Act of 2018 (VBTA)? The VBTA fixes the “same state rule” problem for military families with split legal residences. The “same state rule” remains, but now spouses can simply elect to have the same residence for state and local tax purposes as the service member. Following an election, the factors previously used to determine the spouse’s legal residence – such as the spouse’s physical presence in a particular state or the identity of the state in which the spouse maintains a driver’s license, vehicle or voter registrations, or professional licenses – are no longer relevant. In other words, if a service member is a legal resident of a particular state for tax purposes, the spouse can unilaterally elect to also be a resident of that same state. Spouses can make this election for state and local returns beginning with taxable year 2018.

PROCEED WITH CAUTION. MSRRA does not relieve you of filing state tax returns. You are still responsible for filing a state return.

EXAMPLES:

•  Florida-domiciled Soldier marries a person domiciled in North Carolina while stationed at Fort Bragg in 2016. In 2017 the couple move to Virginia in compliance with PCS orders assigning the Soldier to Fort Lee, where the spouse obtains new employment. Prior to the VBTA, during the 2018 tax filing season, the spouse files a 2017 Virginia income tax return because under the MSRRA, the couple did not share the same state of legal residence or domicile and therefore could not invoke the MSRRA. However, now, under the VBTA, during the 2019 tax filing season, the spouse elects to have the same residence of the Soldier for tax purposes – Florida. The spouse’s wages and other income are no longer taxable by Virginia, but are taxable by Florida.

• The Soldier’s domicile is Texas. Texas has no income tax. The Soldier is assigned to Virginia. While in Virginia, the Soldier meets and marries his spouse who is working in Virginia and whose domicile is Virginia. Under the VBTA, the spouse can now elect to use the same residence for tax purposes as the service member – Texas. Now, Virginia cannot tax the spouse’s income.

• SGT Orville P. Snorkel’s domicile is North Carolina. While assigned to Fort Polk, Louisiana SGT 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. SGT 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. Louise has already done all this as Louisiana is her domicile. SGT Snorkel and Louise file and pay Louisiana income tax the entire time he is stationed in Louisiana. SGT Snorkel is assigned to Hawaii; Louise moves to Hawaii to live with SGT Snorkel and gets a job in Hawaii. Louise can assert MSRRA – her domicile and SGT Snorkels are the same – Louisiana. Hawaii cannot tax Louise’s income earned in Hawaii; however, Louisiana can tax her income. It is incumbent on SGT Snorkel and Louise to file and pay Louisiana income taxes.

• SSG Amos T. Halftrack’s domicile is North Carolina. While stationed in Texas (his third duty station), SSG Halftrack meets and marries Martha. Martha’s domicile is Texas. SSG Halftrack then PCS’s to Hawaii. Because of the same state rule, the MSRRA is of no use to Martha. However, under the VBTA, Martha can elect to share the same residence as Amos for state tax purposes. Martha can file a North Carolina tax return.

If you have any questions concerning these matters, please call the Legal Assistance Office for an appointment at (808) 655-8607. The Legal Assistance Office is located at 278 Aleshire Ave., Bldg. 2037, Schofield Barracks, Hawaii 96857. We welcome service members, retirees, and family members from all services, posts, and bases. Mahalo.

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