Understand your state tax domicile and the Servicemembers Civil Relief Act?

| January 24, 2019 | 0 Comments

Verndal C.F. Lee
Legal Assistance Office

Is your state tax domicile a big deal? Yes, it is.

Everyone, including service members, owes state income tax to their state tax domicile. Under the 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.

Tax Forms

Tax Forms

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), where you own real estate, where you hold professional licenses, titling and registering your vehicles, hold a driver’s license, 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 is.

Servicemembers 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 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 September 11, 2011. Being extremely patriotic, they rushed to the nearest New York recruiting office and enlist 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 SGTs – PCS 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. SGT 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. SGT Snorkel and SGT Halftrack decide to disregard the “opportunity” to have Finance stop deducting North Carolina income taxes. SGT Rock does not file North Carolina income tax returns for the 3 years he is stationed at Fort Hood. SGT Snorkel and SGT Halftrack continue to file, and pay, North Carolina income taxes. SGT 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 SGT 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.

Military members must understand the difference between "domicile" and "home of record." (Courtesy photo)

Military members must understand the difference between “domicile” and “home of record.” (Courtesy photo)

Third Duty Station

The SGTs receive PCS orders 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. He completes the DD Form to stop North Carolina tax deductions, calling Louisiana home. SGT 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”. SGT Snorkel’s domicile is now Louisiana. North Carolina remains the domicile for SGT Halftrack and SGT Rock.

Fourth Duty Station 

Now SSG’s, the three Soldiers receive PCS orders to Schofield Barracks, Hawaii. SSG Rock decides he doesn’t want to move to Hawaii. He returns to North Carolina, finds a job, and moves back into his home. Mr. Rock files and pays North Carolina income tax. An auditor wonders why Mr. Rock has not been paying North Carolina income tax for the previous six years. Mr. Rock is unable to prove he intended to make Texas his permanent home – he actually returned to North Carolina. Mr. 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, 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 SSG Snorkel’s military pay earned outside Louisiana is exempt from state income tax.

Martha Halftrack and SSG Halftrack have two different domiciles – Texas and North Carolina. However, under Section 302 of the Veterans Benefits and Transition Act of 2018, Martha may elect her husband’s state domicile as her own and pay taxes to that state. (See State Tax Residency for Family Members Information Paper)

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.

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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