Don’t pay more taxes than you must.
The MSRRA changes the basic rules of taxation with respect to military spouses who earn income from services performed in a State in which the spouse is present with the Service member (SM) in compliance with military orders when that State is not the spouse's domicile (legal residence). When this happens the spouse generally will not have to pay income taxes to the current State where income is earned. The spouse, however, is still required to pay income tax to the domiciliary State (if State taxes wages). The law is complicated and fact specific, and because its effect will depend on the interpretations of each State, SMs and their spouses are encouraged to seek advice from tax and law professionals.
What is domicile (legal residence)?
It is the place that one considers "home," where one has been physically present (generally this means lived) and formed the intent to remain for the indefinite future and return when temporarily absent. Examples of contacts with a State that help prove domicile include: where one votes, owns property, holds professional licenses, registers vehicles, holds a driver's license, accepts tax breaks for a declaration of homestead, or indicates where his or her last will and testament should be probated. An individual can abandon an old domicile by being physically present in another State, forming the intent to create a new domicile there, and establishing new contacts with the new domiciliary State. Spouse and SM are domiciled in Texas. The SM is reassigned from Texas to Virginia and spouse accompanies the SM to Virginia. The spouse, would, comply with the tax laws of the State of domicile, in this example, Texas.
How is this different from the current rules for Service members?
A Service Member does not pay State taxes on military pay and allowances earned in the State where the SM is assigned (assuming the Service Member’s State of assignment and domicile are not the same). This now applies to accompanying spouses, for all income from services performed. Both Service Members and spouses are also responsible for complying with the tax laws of their domiciliary State.
Common misunderstandings and uncertainties;
- The MSRRA does not allow a spouse to pick or chose a domicile in any State. Domicile is established, not arbitrarily chosen. The spouse must have been present in the State, established it as his or her domicile, and maintained it as such by forming and maintaining the necessary contacts.
Having once lived in a State (even if the spouse once established domicile through registering to vote, obtaining a driver’s license, or other actions) will not allow a spouse to now claim the State as his/her domicile unless the spouse has continued to maintain enough contacts with the State.
- The MSRRA does not relieve the spouse from paying State income taxes on income other than for services performed in the non‐domiciliary State. For example, income from the sale of real property or from rental property would be taxable in the State where the property was located, MSRRA notwithstanding. The spouse must also comply with the tax laws of the domiciliary State.
The rules around the MSRRA are complex and situation based. Each state applies them in a different way. Consult your tax advisor about how to apply this rule and reduce the amount of taxes you pay.