It's tax season, and the big question for military spouses is, "Where do I file my state income taxes?" There is a lot of misinformation available, and not all tax professionals understand the laws, so it is important that all military spouses understand exactly what protections and rights they do and do not have.
For some perspective, let's consider how it works in the civilian world. If a civilian moves to a new state, they change their state of legal residence (domicile) when they move. Civilians pay state taxes to the state in which they actually live. If they move mid-year, they file a partial year tax return to the first state and a partial year tax return to the second state.
Active duty service members are not required to change their state of legal residence with each move. The Servicemembers' Civil Relief Act (SCRA) allows them to keep their state of legal residence. They must demonstrate their intent to make it their permanent residence. Such intent is typically demonstrated by registering to vote, actually voting, registering a vehicle, holding a driver's license, and other actions. The service member's military compensation is considered income in their state of legal residence. If the state of legal residence requires filing of an income tax return, or payment of income tax, the service member is responsible for fulfilling those responsibilities of a resident of the state.
Since 2009, the Military Spouses Residency Relief Act (MSRRA) allows military spouses to retain that state of legal residence when they move to a new state as the result of Permanent Change of Station (PCS) orders. Under the federal law, the service member and the spouse must share the same state of legal residence in order to claim this protection.
Using these two federal laws, a military spouse may be a legal resident of either the state where they are residing, or a prior state of legal residence, if it is the same state of legal residence as the active duty member and the move to the new state was the result of PCS orders.
Here are five of the most common questions about military spouse state taxes:
My Job Took Out Taxes Where I Live. What Do I Do?If you are permitted, under either state or federal law, to retain your state of legal residence in another state, then you will file a non-resident return for the state in which you work. You should receive all your taxes back from that state. You then file a regular return in your state of legal residence (if required.)
Why Do We Need To Have The Same State of Residence?I don't know for sure, but here's what I suspect: The logic behind the SCRA and MSRRA is that military families should be able to retain their legal ties to the place that they consider home, and to which they intend to return when military service is over. A married couple would share a home and intend to live together after the military. Therefore, to enjoy the protections of the federal law, the service member and spouse must share the same state of legal residence.
But We Don't Have The Same State!In my opinion, this is a problem with the law. Let's say that Lieutenant Movesalot is a legal resident of Texas, and he marries someone from Maryland. They move every two years, but are never stationed in Texas. Lieutenant Movesalot's spouse can not claim Texas residency because he or she has never lived there. Under federal law, he or she can not retain any other state of legal residence. He or she would have to change his or her state of legal residence with every move. This unfairly burdens military families who do not happen to receive orders to the active duty member's state of legal residence, or who do not get orders to a place where both parties want to establish legal residence.
There is a law in Congress to allow military spouses to obtain legal residency in the state of legal residence of their active duty spouse without having to meet the physical residency requirements.
Why Is My State Law Different?The Military Spouses Residency Relief Act is a federal law. State law may differ for many reasons, but must always grant at least the protections of the federal law.
I Still Have My Job From My Last State. Where Do I File?Telecommuting is becoming more common, and some military spouses are able to keep their jobs when they move to a new location. But how does that affect your taxes?
If you're an independent contractor, and paid via a 1099, then you will file your income taxes in your state of legal residence. You may also need to file as a business in the state in which you are living, but that is an entirely different question.
If you are an employee paid via W-2, then the answer gets a lot trickier and you should research your exact state and probably also consult with a tax professional. In general, you pay tax to the state in which you work (the "physical presence" test.) However, certain states have other rules. When you combine the telecommuting rules with the military spouse rules, you can have a mess. I don't recommend you figure this out on your own.