Tax law may help spouses
January 31, 2014
FORT BENNING, Ga., (Jan. 29, 2014) -- The Military Spouses Residency Relief Act is an advantageous law that may potentially assist military spouses who move to a new location with his or her service member and earn income. The Fort Benning Tax Center would like to help you understand the act and how it may affect your taxes this upcoming tax season.
Normally, a worker will be taxed by the state in which income is earned. Under longstanding federal law, service members with a domicile in a state other than where they are stationed can't be taxed on military income earned in that state. Federal laws recently changed the location for tax considerations for the spouse and the service member to the state of domicile. However, the service member still can be taxed by the state on nonmilitary income earned in that jurisdiction.
A spouse who moves to a new state and establishes a new residence and a new life there would normally become a domiciliary of that new state. The act allows a service member's spouse to keep a previous domicile (under qualifying conditions listed below). The spouse may, however, choose to become a domiciliary of the new state.
Similarly, under most state laws, a spouse who spends more than 180 to183 days in a state would be declared to be a resident and could be taxed. Under the act, a service member or a spouse who is domiciled elsewhere for purposes of taxation will not become a resident of the state (and thus could not be taxed), unless he or she chooses to acquire domicile there.
Eligibility requires three factors. The spouse of a service member is exempt from income taxation by a state when he or she:
•Currently resides in a state different than the state of domicile;
•Resides in the state solely in order to live with the service member;
•The service member is present in the state in compliance with military
orders; and in some states,
•The spouse and the service member both must be able to claim the same domicile.
If the spouse meets the above requirements, the spouse is entitled to a refund of any taxes already paid to such state through withholding and estimated payments. The spouse then will pay tax to the state of domicile, assuming that state has an income tax. States with withholdings for the previous year will have eligible spouses file a claim for a refund directly with the state, using existing procedures.
A state's current statutes on domicile are not changed by the act except that it prohibits a state from automatically claiming a spouse as its domiciliary merely because he or she has moved there to be with a service member who is under orders to be in the state. Thus:
• Spouses cannot pick and choose their states of domicile;
•The spouse does not "inherit" or "adopt" the domicile of the service member upon marriage;
•The spouse must be able to show he or she had the domicile before moving into a different state, and the spouse must be able to prove that the domicile existed by going through the new state's existing list of facts and circumstances, or "proofs of intention," that will demonstrate a domicile;
•The spouse must have maintained an earlier domicile;
•At a minimum, the spouse must have lived in a state before claiming it as a domicile;
•A spouse who has never lived in State X cannot simply tell the employer that he or she is now a domiciliary in State X and become exempt from withholding; and
•A service member may work in (be stationed in) a state other than the state of residence. Likewise, the spouse may work in a state other than the couple's state of residence. This happens frequently where there are military bases near state lines. State regulations will differ on whether the spouse who works in a state other than the state of residence is eligible under the act, although existing border state agreements would apply.
The act applies to wages and other income from services performed in the state. The act does not apply to other types of income that are not related to services performed, such as income from rental property. Income from a sole proprietorship may be eligible in some circumstances, but generally would not qualify.
Some states require an employee to complete a W-4 or its state equivalent, some allow an employee to use a federal W-4 and write in any necessary changes to allow for state withholding, and some do not use a W-4 at all. Most of those who do not use a W-4 have a special form for the employee who seeks to be exempt from withholding. Whatever form a state uses to deal with withholdings and exemptions will need to be changed, or a new one created. State regulations typically require the W-4 or other withholding form be validated on at least an annual basis.
Common scenarios that will cause the spouse to no longer be eligible include:
•Service member leaves the service
•Voluntary physical separation due to duty changes -- the service member's orders move him or her to a location outside the state where the spouse is allowed to join him or her but chooses not to
•Spouse commits an action that clearly establishes the state of residence as his or her state of domicile. These would include filing a court action, such as a claim for divorce; accepting in-state tuition; voting; using a property tax homestead exemption; and applying for certain state benefits, such as a tax credit available only to domiciliaries
The following common scenarios that will not cause the spouse to become ineligible include:
•Soldier deployed to a war zone or other location where the spouse is not allowed to follow. The military treats this as a "travel" or "TDY" situation; the Soldier's orders do not change.
The Fort Benning Tax Center opens Jan. 30 after 2 p.m. and will file federal and state returns for the 2014 season until the deadline on April 15. All returns are prepared at no charge by individuals certified by the IRS. The Tax Center will be open Monday, Tuesday and Thursday from 9 a.m. to 4:30 p.m., Wednesday noon to 8 p.m., Friday 9 a.m. to 4 p.m., and every other Saturday beginning Feb. 8 from 9 a.m. to 1 p.m.