Spouses: Your Income Isn’t Exempt

Office meeting.

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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • LauraBeth64701

    Thank you so much for clarifying this!! I’m a new mil spouse & when doing taxes I saw the MSRRA… & honestly was a bit confused on what it entailed/who could use it. This has helped me out so much!

    • Lou

      This article is wrong. It all depends on the state, but both the military member and spouse do not have to share the same state of residence. The military spouse may retain their state of residence under the law. I went straight to the Navy JAG that handles tax law in DC. He confirmed everything I just said and I got MD to give me back my paid taxes when I should have been able to maintain my WA state residence. This is a common mistake made with interpretation of the law, because it is up to each individual state on how they accept your residence as shared or separate. Best decision for any spouse is contact a specialist in your state that deals with the law, and look up the law’s interpretation for your state. Don’t just make a decision to not pay taxes without proper consultation. My two cents.

      • Kate

        Lou, you may be interested in reading the exact portion of the law the states that the residence must be shared:

        “A spouse of a servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the servicemember in compliance with the servicemember’s military orders if the residence or domicile, as the case may be, is the same for the servicemember and the spouse.”

        I can’t speak to your exact situation, but that’s what the law says.