Filing State Taxes When You are Serving in the Military
Filing state taxes when you are serving in the military can be complicated and confusing. If you are on active duty and stationed in another state or overseas, you should have state taxes taken out of your pay for your Home of Record (HOR) or state of legal residence (SLR), if it taxes military income. Most states do not. The Home of Record is the state, where the service member enlisted. The HOR and SLR is the same for most military members unless they changed their state of legal residence after enlisting.
If your spouse is living and working in a state where you are stationed in the military for active duty, state taxes can get more difficult to understand. Even though the current and past administrations have tried to make it easier to file state income tax returns for military families, it still can be difficult to navigate the many state tax laws. Under Obama, the Military Spouse Residency Relief Act (MSRRA) was enacted to allow certain military spouses to claim the military member’s Home of Record or state of legal residence. Under Trump, the Veterans Benefits and Transition Act extended MSRRA to apply to all military spouses regardless if they had established legal state residence in their military spouse’s state of legal residence or not.
How Your Home of Record Affects Your State Tax Return
If you are serving on active duty in the military, you just need to file one state tax return for your Home of Record or state of legal residence (SLR) unless you have state specific income, such as business income, civilian (nonmilitary) wages, or rental income, in addition to your military income. This applies regardless if you are stationed in another US state, territory, or overseas. This makes it easier for military members, who may move multiple times during a year, so they only have to file one state tax return for their SLR.
Only filing state taxes in for your SLR provides a huge benefit to military members, who’s state either does not have a state income tax or does not tax military income. Ohio does not tax military income, if you are stationed outside of Ohio. If your Home of Record / state of legal residence is in a different state, you can check here to determine how your state taxes military income.
Example. John’s enlisted in the military when he was living in North Carolina. Two years ago, he was stationed in Ohio and updated his state of legal residence to Ohio, which was accepted. Last year, John was stationed in Virginia for the entire year and earned the following income:
$25,000 Military Income;
$10,000 Business Income from the Family Business in North Carolina;
$12,000 Rental Income from His Rental Property in Virginia; and
$10,000 Part-time Job in Virginia.
John’s military income of $25,000 would be taxed in Ohio. Since Ohio does not charge taxes on military income earned while stationed outside of Ohio, his military income would not be taxed by Ohio. John would need to file a nonresident North Carolina state tax return to report the business income earned from North Carolina sources, and he would need to file a nonresident Virginia state tax return to report the rental income and civilian wages from his part-time job. Although the Service Member Civil Relief Act makes filing state taxes easier for military members, John would still need to file three state tax returns: Ohio, Virginia, and North Carolina.
Many states give a credit for taxes paid to other states on your resident tax return. It is important to complete your nonresident tax returns first, so if applicable, you can transfer the correct credit to your resident state tax return you file for your SLR.
Example. Elizabeth’s Home of Record is Ohio. Last year, she was stationed in North Carolina and Texas. She earned the following income last year:
$15,000 Military Income while Stationed in North Carolina; and
$10,000 Military Income while Stationed in Texas.
Elizabeth only needs to file one state tax return for Ohio, her Home of Record and SLR. Although Ohio does not tax her military pay earned while stationed in North Carolina and Texas, Ohio Department of Taxation recommends filing a state tax return to avoid failure-to-file (delinquency) billings.
If your Home of Record taxes military income and you have established residency in another state that does not, you can update your state of legal residence by filing DD Form 2058 with your local finance officer. If it is accepted, that would change the state, where you need to file your state tax return from your HOR to your SLR.
To establish residence in another state other than your Home of Record, you may need to:
- Establish a permanent residence;
- Register a vehicle;
- Change your voter registration; and/or
- Get a driver’s license.
Please note just changing the state for your state tax deductions on your paycheck is not enough. If you do not change your state of legal residence, this could result in you being owed a refund from one state and needing to pay state taxes and an underpayment penalty to your HOR / SLR, where the state tax deductions should have been sent throughout the year.
Military Spouse Residency Relief Act (MSRRA)
Before November 11, 2009, when the Military Spouse Residency Relief Act (MSRRA) was signed into law by Obama, military spouses, when living in states where their military spouses were stationed, had to file state taxes based on where they earned their wages. This resulted in military members needing to file a state return for their Home of Record, and their spouses needing to file separate state tax return(s) based on where they resided and earned income. Military Spouse Residency Relief Act (MSRRA) only applied to certain military spouses. The military spouse had to be a resident of the military member’s HOR / SLR to qualify.
In 2018, President Trump signed the Veterans Benefits and Transition Act, which allows military spouses to choose the state of legal residence of their military spouse for state and local tax purposes and registering to vote, if they are living outside that state because the military member is stationed there. It removed the requirement that they must have previously lived in the state to establish residency.
Example. Robert was serving in the military on active duty. Last year, he was stationed in Texas, where he lived with his wife, Donna. Robert only received military income. Robert’s Home of Record was Ohio. Donna earned wages from her job in Texas and was a resident of Ohio.
Robert filed an Ohio state tax return to report his military income, so he would not have to deal with a failure-to-file (delinquency) notice. Now, Donna has the flexibility to choose either the legal residence of the military spouse or Texas, where she resided and earned the income. If Donna chooses Ohio, her wages would be taxed in Ohio. If she chooses Texas, Texas does not have a state income tax, and her wages would not be taxed. (I’m not sure about you, but that would be an easy choice for me!)
Also, the reverse could be true. For example, if Robert’s Home of Record was Texas, but he was stationed in Ohio, he would not need to file a state tax return. If Donna earned wages from her job in Ohio, while living their with her military spouse while he was stationed there, she could claim his Home of Record, Texas, so her wages earned in Ohio would not be taxed.
If you are working in a state where you live because your military spouse is stationed, it is important you have taxes deducted from your pay for the correct state. If you do not, you may need to file a state tax return to get the amount deducted refunded. Also, if you claim your military spouse’s state of legal residence and owe taxes there, you may get stuck with a large tax bill and an underpayment penalty.
For additional information on the Veterans Benefits and Transition Act of 2018 and how it affects state taxes for spouses of military members, read the article here in the Military Times.
The Bottom Line
Are you still confused? I assure you, you are not alone. Despite the current and previous administrations trying to make filing state taxes easier for military families, filing state taxes can still be a confusing and complicated process. Depending on the military family’s income sources, they still may need to file multiple state tax returns. Also, if one spouse has state specific income, such as business or rental income, it often is best to file your federal tax return as married filing jointly but file the state return as married filing separately. Most online tax software does not provide an easy way for taxpayers to file their federal tax return using one filing status, for example, married filing jointly, and their state tax return with a different filing status. This can result in taxpayers paying higher state taxes than required.
To make sure you are filing your tax return(s) correctly and advantageously, schedule an appointment with the tax professionals at Gudorf Tax Group. They work with military families to ensure their income is not taxed twice and is taxed at the lowest rate possible.