Military Spouse Residency Relief Act and State Taxes

The spouse of a service member is exempt from income taxation by a state when all three of these qualifications are met.

The spouse:

1. Currently resides in a state different than the state of his or her main tax home (or state of residence when the service member joined the military);
2. Resides in the state solely in order to live with the service member; and,
3. The service member is present in the state in compliance with military orders.

NOTE: Some states also require a fourth qualification: The spouse and the service member both are able to claim the same domicile.

Check requirements for your state here: State Tax Websites.

Consider the example of Matthew who grew up in South Carolina. He married Michelle in South Carolina and joined the military while there. Matthew kept South Carolina as his home of record.

In 2010 Matthew received a permanent change of station to Maryland and Michelle accompanied him. They both worked and lived in Maryland.

Under the law, Michelle has chosen to make South Carolina her state of residency for taxes and other purposes, like voting and car registration, the same state of record as Matthew, which is South Carolina.

When preparing their 2011 state income taxes, they will file a joint South Carolina resident return. 

The law, however, has not changed in regard to “non-military” income that a service member earns in addition to service wages. The state in which a military service member resides can still tax the service member’s non-military income earned in that state.

If Matthew has been working weekends at the local Home Depot, Maryland can still tax his non-military earnings. When filing states returns, he and Michelle will FIRST file a Maryland nonresident return in TurboTax and pay tax any tax owed. Then they then will fill their joint Carolina return in TurboTax and get an “out-of-state” tax credit for the amount of tax Matthew paid to Maryland.

Federal law prohibits states from taxing the military wages of non-resident military members stationed in their state. Unless they chose to change their state of residence, military personnel are considered residents of their military home of record. The military designates the home of record as the state where members of the military enlisted, unless they choose to change it.

For example: A Marine who enlisted in New York state, but was stationed in Oceanside, Ca., and received only military income, would file a New York state tax return, since that is the home of record.

However, if while stationed in Oceanside, the Marine also worked off hours at a local business, that income would be non-military income subject to the California and local taxes. If required by local state law, the Marine would also file a nonresident California tax return, then file a New York state return.

Not necessarily. Tax laws vary from state to state, so each couple will have to weigh the tax and filing benefits before choosing. Other factors could also influence which state to pick, such as:

• Voter registration
• Auto registration
• In-state college savings plans and in-state college tuition savings
• Car, home or other insurance
• Wills and estate plans
• Powers of attorney
• Spouse's business/professional licenses

One factor alone isn't enough by itself to determine residency. These and other factors taken together can be used to determine which state you are a resident of for tax purposes. Also be aware of community property issues if your resident state is a community property state. Community property states are: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. See your state’s individual website found at State Tax Websites.

See I Have Questions About State Taxes, or Prepare and File Your Individual State Tax Return.