It must be tax-time, because the emails and comments and social media boards are awash in questions about where military families need to file their state income taxes. We’ve covered this topic extensively here at The Paycheck Chronicles, but it never hurts to talk about the subject again. Sometimes, you have to hear something in different ways before it actually makes sense.
There are multiple different issues here, but they are closely related and somewhat inter-twined. One issue is where you maintain your state of legal residence. The second issue is where you need to file state income tax returns. The third issue is what type of income is earned in which state. You may have to file state income tax returns in multiple states, including your state of legal residence, depending on your exact tax situation.
Active Duty Service Members
Active duty service members are permitted to maintain their state of legal residence, or the place where they are domiciled. This right is provided under the Servicemembers Civil Relief Act (SCRA.) Domicile is determined by your long-term intent, as demonstrated by a wide variety of factors such as where you are registered to vote, where you file a state income tax return, where you register your vehicles, where you maintain your driver’s license, and where you accept a homestead exemption on real property tax.
It is in a service member’s best interest to show clear intent by maintaining all evidence, as listed above, in the same place whenever possible. Once you start mixing and matching states, you are no longer showing clear intent and you are possibly opening yourself up to having a state claim that you are a resident there even if that is not your true intent.
The rules are a little trickier for military spouses. In the past, military spouses were required to change their state of legal residence every time they moved. With the passage of the Military Spouse Residency Relief Act, there is now a federal law that allows military spouses to maintain their state of legal residence even after they move away, if it is the same state that the active duty service member maintains as his or her state of legal residence. If the military spouse does not or can not establish legal residence in their service member’s state of legal residence, then they military spouse must continue to file state income taxes in the state where they are physically residing.
In short, federal law gives military spouses two options:
- Claim residency in the state where they actually reside, or
- Maintain their previously established state of legal residence, if it is the same as the service member’s state of legal residence.
However, state taxes are a state law issue, not a federal law issue. The federal law only specifies the minimum protections that states must offer to military spouses; it doesn’t prevent states from giving military spouses more generous residency and non-residency rules. As a result, the state filing requirements for military spouses vary from state to state.
This makes it tricky for military spouses who don’t fit the MSRRA, because they can’t always be sure where to file their state income taxes. There are two overriding concepts here:
- Military spouses with income must file state income taxes somewhere (or not file, if they can legitimately claim residency in a state that doesn’t require filing,)
- Military spouses are never incorrect in filing state income taxes in the state where they are physically residing and earning income.
Once you get past those two concepts, then it starts getting harder. In some states, military spouses who are physically residing there must file a resident state income tax return unless they are exempt under the strict directions of the MSRRA. In other states, military spouses have no problem claiming that they are non-residents even when their situation doesn’t fit the MSRRA framework. In other words, some states are more generous with their willingness to let military spouses claim other states, even if it isn’t required by the federal law.
If you’re not sure where you should file, you’re going to have to make a well-educated guess based upon a variety of information. Look at the things that generally demonstrate domicile, consult state law, consider the federal law (MSRRA), and see what the evidence shows.
While states can be remarkably generous about giving leeway to military service members and their spouses, and there are federal protections to prevent military service members and their spouses from being forced to change residence with every move, it doesn’t mean that these groups have an open pass when it comes to their state of tax filing. While rarely enforced, the penalties for filing in the wrong state can be strong, and you definitely don’t want to get involved in any sort of disagreement about your state of legal residence.