In the on-going conversation about the Military Spouses Residency Relief Act (MSRRA) and paying taxes, I have had quite a few people mention to me that they “got all their taxes back” or that they were “exempt” from paying taxes. I want to make sure that there is no confusion about this: the MSSRA does not make you tax exempt. The MSSRA gives military spouses the option to pay taxes to their state of legal residence instead of the state in which they are living and working, if their state of legal residence is the same as their active duty husband or wife’s state of legal residence. And it is true that some states do not tax basic earned income, and that those states are popular for military families to claim as their states of legal residence.
So, perhaps what people are saying is that they didn’t have to pay taxes in the state where they worked, and their state of legal residence doesn’t have a personal income tax. That’s absolutely fine.
What worries me is the impression that there are some spouses who are not paying taxes, or getting a full refund of the taxes, in the state where they live and work, but not then going ahead and filing taxes with their state of legal residence, if required. That would be tax evasion, and that’s not right.
Let me give you some examples:
Example #1: Both spouses have the same legal residence in a state that does not tax personal income: No taxes are paid anywhere.
Nancy Navy lives with her active duty husband in Virginia, though they are both legal residents of Florida. Nancy has a job in Virginia, and she does not have any state taxes withheld. That is fine, because Florida does not tax personal income.
Example #2: Spouses do not share a state of legal residence: Military spouse pays income taxes in the state where he or she lives.
Andrea AirForce lives with her active duty husband in Delaware. She is a legal resident of Indiana, and he is a legal resident of Ohio. If she works, she must pay Delaware income taxes because the MSRRA only applies to military spouses who share the same legal residence as their active duty husband or wife.
Example #3: Both spouses have the same state of legal residence in a state that taxes personal income: Military spouse may choose to pay taxes in their state of legal residence or in the state where they work.
Andrew Army lives with his active duty wife in Kansas. He is a legal resident of Maryland, as is his wife. Andrew may choose whether to pay state income taxes to Kansas or to Maryland. If he is truly a legal resident of Maryland, then the policy of keeping things straight would suggest that he should choose to pay taxes to Maryland. If Andrew chooses to pay taxes to Kansas, this could imply that Kansas is now his state of legal residence.
If Maryland taxes are not withheld from Andrew’s Kansas paycheck, he would be responsible for claiming that income on the couple’s Maryland state income tax return.
I understand that this is confusing, but it essential that you get it right. Not paying income taxes when required is sort of a big deal, and you can’t rely on other people to know the correct information. If you are not 100% sure about your situation, please check with your base legal office for guidance. You don’t want to mess this up.