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Military servicemembers and spouses have much more flexibility when it comes to declaring their state of legal residency and where they pay state income tax.
Because military families move so often, the federal government has passed laws that allow military servicemembers and military spouses to have a more flexible state of legal residence than civilian members.
This can be especially advantageous when it comes to state income tax. A military servicemember stationed in one of the tax free states can declare that state as their state of legal residence.
The income tax-free states are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming.
A military spouse can also pick 1 of 3 options when declaring his or her state of legal residence for tax purposes:
- The residence or domicile of the servicemember.
- The residence or domicile of the spouse.
- The permanent duty station of the servicemember.
So for example, a military spouse is in medical school in Indiana. She is married to a Navy officer stationed in Texas. The military spouse could match “the residence or domicile of the servicemember” and declare Texas state of legal residence, even though she's never entered the state of Texas.
Kate Horrell has covered this topic extensively on her site State of Legal Residency and in this SCRA and Military Spouses State Taxes article.
Podcast Episodes on Military Taxes, State of Legal Residency, and Military Spouse Residency Relief Act
Military State Taxes
Your home of record is the place you enlisted or commissioned from. This cannot be changed unless there was an error.
Military spouses do not have a home of record. A home of record only exists for a member of the armed forces.
State of legal residence is the state that you claim as your residence. If you only have military income, you will pay state income tax only to this state on your military income. Other income, such as a side business or another W-2 employment, is not subject to your state of legal residency and will most likely be taxed in the state you are physically performing the work.
You can establish residency several ways:
- Registering to vote in that state
- Obtaining a driver’s license in that state
- Titling and registering your vehicle in that state
- Drafting a Last Will and Testament naming that state as your domicile
- Purchasing residential property in that state
- Changing your military and finance records to reflect residency in that state.
The simplest way to establish residency is to PCS to that state and establish residency while you are physically in that state.
State with no income tax include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming. Many other states have no tax for military servicemembers stationed outside the state.
Simply engaging in one of the above acts alone will not likely render you taxable by a state; however, the more points of contact you make with a state increases your chances of becoming a taxpayer to that state.
It is important to concentrate the majority of your points of contact in the one state where you intend to pay state taxes; otherwise, you may find yourself owing taxes to more than one state as a part-year resident.
You can change your state of legal residency with DD Form 2058, State of Legal Residence Certificate. This will change the state listed on your Leave and Earnings Statement (LES) and your W-2 tax statement. DFAS will withhold taxes for the state listed on your LES.
Source: Fort Knox Legal Assistance Office
Veterans Auto and Education Improvement Act of 2022 and Military Spouse Residency Relief Act
https://www.congress.gov/bill/117th-congress/house-bill/7939/text
Thanks to the Military Spouse Residency Relief Act, Veterans Auto and Education Improvement Act of 2022, and Servicemembers Civil Relief Act:
SEC. 18. RESIDENCE FOR TAX PURPOSES. Section 511(a) of the Servicemembers Civil Relief Act (50 U.S.C. 4001(a)) is amended by striking paragraph (2) and inserting the following:
“(2) SPOUSES.—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.“
(3) ELECTION.—For any taxable year of the marriage, a servicemember and the spouse of such servicemember may elect to use for purposes of taxation, regardless of the date on which the marriage of the servicemember and the spouse occurred, any of the following:“
(A) The residence or domicile of the servicemember.“
(B) The residence or domicile of the spouse.
“(C) The permanent duty station of the servicemember.”Once more for those in the back:
Military spouses and military servicemembers can pick 1 of 3 options for their state of legal residence:
- (A) The residence or domicile of the servicemember.
- (B) The residence or domicile of the spouse.
- (C) The permanent duty station of the servicemember.
So either match the servicemember, match the spouse, keep your old state, or change to the current state you're stationed in.
If you are married filing jointly it's usually useful to have the same residency as your spouse. This makes filing your taxes much simpler as you only need to file one state tax return.