The military and State taxes: Do military members pay state taxes?
Special rules tell when the military and spouses pay state taxes in one state, multiple states, or even no state if there is a military state tax exemption
Joining the military and serving the country on active duty is a great honor. It also means some extra considerations for servicemembers and their families, sometimes in unforeseen ways.
Servicemembers have a lot to navigate when it comes to taxes, especially as they move from post to post, base to base, and duty assignment to duty assignment.
Key benefits that active duty members of the military receive include:
- Combat zone pay
- Uniform allowances
- Housing and subsistence allowances
- Travel and family allowances, including certain types of educational expenses, all of which are not subject to taxation
Servicemembers are often confused about where to pay state taxes
One of the biggest challenges that members of the military face is figuring out where they need to pay taxes. As U.S. citizens, servicemembers know that they must pay federal taxes and file a federal tax return.
But, moving from state to state causes confusion. Do they need to file a return in every state where they’ve lived. And, if so, how – as a resident or nonresident? And, do any states have a military state tax exemption?
As to military compensation, the Servicemembers Civil Relief Act (SCRA) sets out controlling rules for how and which state tax laws apply to military servicemembers.
Legal residence vs. home of record: some important tax terms to know
Domicile/state of legal residence
A servicemember’s domicile/state of legal residence is the state where they make a permanent home. It’s where the servicemember plans to return after they are absent from that permanent home for any period of time. The periods include being assigned in another state or country under Temporary Duty (TDY) or Permanent Change of Station (PCS) orders.
Servicemembers provide their domicile/state of legal residence when they first enter the military. They complete a Defense Department Form (DD-2058), called a Certificate of Legal Residence.
The Defense Finance and Accounting Service (DFAS) – the military payroll agency – uses the DD-2058 to report and withhold state income taxes. Servicemembers can change their designated state by filing a Form DD-2058 and meeting specific requirements found on the form.
Home of record
To avoid potentially serious tax problems, servicemembers should not confuse domicile/state of legal residence with home of record. Home of record is simply the state from which an individual entered military service.
For tax purposes, the term “home state” is often used as a shorthand term to mean the “domicile/state of legal residence.” It is not necessarily the “home of record.”
In many situations, a servicemember’s home of record and state of legal residence can be the same, but not always. A servicemember can change his or her state of legal residence, but the home of record remains the same for the duration of military service.
The government uses the home of record to determine certain benefits. This includes the travel allowance when the servicemember is discharged. However, home of record is never used for tax purposes. The home of record is changed only to correct an error, or after a break in military service.
Military State Tax Exemption
Because some states provide exemptions to resident servicemembers who meet specific conditions, some servicemembers won’t pay any state taxes at all. New York, New Jersey, and Maine are examples.
So where does a servicemember pay state taxes?
Under the SCRA (Servicemembers Civil Relief Act), military servicemembers owe state taxes on their military compensation only in their home state (domicile/state of legal residence). That includes any money they earned for military service, regardless of the posting/location where they earned it. Keep in mind that some states provide military state tax exemptions, so servicemembers who meet the conditions for exemption in their home state won’t pay state taxes at all.
Because the SCRA covers compensation only from military service, if servicemembers earn any income outside of military service, they may owe taxes on it in a state other than their home state, as a nonresident.
Example: Private Kurtz owes in two states on two different types of income
Private John Kurtz enters the military from Kentucky. He lived in his home state of Kentucky for 10 years before entering the military. He designated Kentucky as his state of legal residence on his DD Form 2058.
Private Kurtz is then stationed in Arizona on military orders. Under federal law, Kentucky is his home state and he is considered a Kentucky resident for tax purposes. Any military income that Private Kurtz earns while in Arizona is taxed in Kentucky. However, any nonmilitary income he earns in Arizona may be taxed in Arizona and Kentucky.
Properly reporting spousal income can get complicated
Before 2009, servicemembers’ spouses were taxed as residents in the states where they lived while accompanying their military spouses. In addition to paying taxes to the state where they were located, the spouses were also liable for taxes in the home state.
In 2009, the Military Spouses Residency Relief Act (MSRRA) extended tax protections to servicemembers’ spouses. Under the MSRRA, a spouse will have to file a tax return only in his or her state of domicile/legal residence IF:
- The spouse is away from that state only to be with the military servicemember, in compliance with military orders.
- The military servicemember and spouse have the same home state (domicile/state of legal residence), or the spouse elects to use the servicemember’s residence for state tax purposes even though the two did not share the same residence or domicile prior to the move, under an amendment to the MSRRA by the Veterans Benefits and Transition Act of 2018 (VBTA).
If the above two conditions are true for the spouse, any compensation the spouse earns as an employee or as a sole proprietor isn’t taxable in the duty state. But the income may be taxable in the spouse’s home state.
- Many couples who move directly from separate states to a new location because of military orders don’t know about this rule.
- If the military servicemember and spouse don’t have the same home state and if the spouse does not elect to use the servicemember’s residence for state tax purposes, the spouse must file a state tax return in the new state where they are located because of military orders, as well as the spouse’s home state.
Here are a few examples.
Example: Spouses have the same home state, with income taxed only in the home state
Lieutenant Marie Childress and her husband, Steve, have a permanent home in Michigan. Lieutenant Childress is called on PCS orders to be stationed in Sacramento, CA. Steve accompanies Marie to California. After a couple of months in California, Steve gets a job at a local restaurant. For tax purposes, Steve did not lose his official residence in Michigan because of the move to California to be with his wife, and he does not acquire official residence in California. The income he earns in California is taxable only in their home state of Michigan.
Example: Spouses have different home states, with income taxed in different states
Varying the above example: Steve resides in Ohio and moves to California to be with his wife in her duty state. They did not have the same state of residence before the move. The MSRRA does not protect Steve. Steve is subject to California’s determination of his residency status.
Example: Spouses have the same home state, with income taxed in different states
Varying the example again, Steve and Marie both reside in Michigan. Steve moves to California to accept a position at a company in San Diego. He lives in San Diego, rather than in Sacramento with his wife. Steve is not present in California only to be with his servicemember wife. The MSRRA does not protect Steve. He is subject to California’s determination of his residency status.
The details are important
When it comes to the military and state taxes, the details make all the difference. Look at all the facts to determine how to properly report state taxes on military, non-military, and spousal income.
Editor’s note: This article was originally published June 21, 2016 and has been updated.
H&R Block Military Resources: H&R Block tax professionals, click to login to the Tax Research Center:
- How is the income of a servicemember’s spouse (civilian spouse) taxed by the state where the servicemember (military spouse) is stationed?
- Multi-State Military Tax Guide
- State Returns for Military Members. Are there special state tax rules for active military members?
- How Moving to a New Home Affects Your Taxes