Married to the Military
New Law Helps Lift Tax Burden For Military Spouses
I love being a military spouse.
There are so many perks — the friendships, the Homecomings, the ability to travel the world.
But of course, there are pitfalls too. The deployment of our spouse, living away from family, and one more that has been plaguing military families for quite some time:
Yes, one of the biggest headaches for many military couples is filing state tax returns, especially when the military spouse is earning income.
As military spouses, we have to deal with a PCS (Permanent Change of Station) every few years, which often means our ties are all over the place!
It’s not uncommon to meet a spouse living in Spain with a Florida phone number, a Virginia license and a completely different state of tax residency than his or her spouse.
Active duty military members are allowed to keep their state residency and be subject to the tax rules of one state (even while constantly moving), but these rules have not always applied to military spouses. With more and more military spouses working and having professional careers, the issue of state taxes has become increasingly difficult to navigate and understand.
Here’s an example:
Joe from Idaho, married active duty Alex from Colorado. Then they moved to Virginia on military orders where Joe lands a great job.
When it came time to file taxes, Joe and Alex filed a joint Federal return, but had to file TWO state returns, Colorado for Alex and Virginia for Joe.
And just when Joe got comfortable with this (and either understood how to file a Virginia return, or had found a Virginia tax preparer who could help him file)…BAM!!…a new set of orders arrive and they move to California.
Every new move meant learning a new set of tax laws and starting over.
THIS. WAS. EXHAUSTING.
Wouldn’t it be easier if Joe and Alex could simply be residents of ONE state and continue to file in ONE state for the duration of Alex’s military career?
So this issue caught the ear of our government and in 2009 they passed the Military Spouses Residency Relief Act (MSRRA).
While this was a step in the right direction, it only allowed spouses to keep their state residency when moving to another state IF the spouse was the same residency as the military member…but the catch was the spouse had to have physically lived in the state and established domicile in the state.
Looking back at our Joe/Alex example, the MSRRA would have done nothing for Joe. Joe could only claim Alex’s state residence of Colorado for tax purposes if he had physically lived in Colorado and established his residency there, which he never did or had the chance to do.
So while the intentions of the MSRRA were good, it still did not help a large group of military spouses.
Thanks to The Veterans Benefits and Transition Act of 2018, military spouses now have the following option starting with their 2018 tax return:
“For any taxable year of the marriage, the spouse of a servicemember may elect to use the same residence for purposes of taxation as the servicemember regardless of the date on which the marriage of the spouse and the servicemember occurred.” (Per Title III, Section 302).
Unlike MSRRA, this act does not require the non-active duty spouse to have lived in and/or established a residency in the same state as the active duty spouse in order to claim that state for tax purposes.
So what does this mean for our good friend Joe?
For tax purposes he can now claim Colorado as his resident state for taxation if he chooses.
Remember, this is not required under the new law so he doesn’t have to, but if he does, he can fill out new paperwork with his employer to start having them withhold Colorado taxes.
Then, as long as Alex is active duty military, they can file ONE state return (Colorado) whether they move to California, Hawaii, Florida or Germany.
So does this mean Joe can claim Colorado for taxes, but keep his drivers license, voter registration, and car registration in Idaho? Technically/potentially yes…but I don’t think that is the purpose of the law and I foresee there being issues down the line with states if you muddy the waters too much.
As such, I recommend that if you decide to claim the same state as your active duty spouse, move other ties over that you can.
Note also that Section 303 of the Act also applies the same transition rules to voting as it does to filing taxes. So if you claim the same state as your active duty spouse, you can also keep your voting rights to that state no matter where you move.
As a military spouse and CPA, I think this is such a great law, but after working with many military families I do know that not all situations are as simple as our example of Joe and Alex.
While I believe that this law simplify state reporting for many active duty military families, I caution spouses to seek professional help if they are confused about how this will impact their specific situation or whether they should even claim the same state as their spouse.
Some examples include:
1.) If the spouse and or military member may have owned real estate prior to marriage and/or have rental properties in states where they are not tax residents.
2.) The spouse may have a professional designation/certification/etc tied to one state.
3.) The spouse may not be an employee, but instead be a business owner performing services in one state, while claiming tax residency under this new law in another. Business ownership and income is a whole other ball of wax so be careful.
As a military spouse and business owner, I understand the complexities and challenges that this lifestyle can bring.
At Krozel Capital, we have worked with a lot of military families over the years through their many moves and life changes. Please contact us if you would like to inquire about our services or to schedule a consultation.