By By Darwin Strickland, Office of the Staff Judge Advocate, Presidio of MontereyMarch 2, 2010
PRESIDIO OF MONTEREY, Calif. -- During income tax season a concern for some military members is where to file state returns. Some are confused after they have moved from another state because of military duties.
Filing a return in a state other than one's legal residence could have costly consequences. You could eventually discover that you owe back taxes to the state that is your legal residence. You might also owe interest on the unpaid taxes. You might also be fined for failing to file.
This article is not a comprehensive legal analysis of state tax law. Rather, it provides basic information about states that levy taxes on earned income. Military members should seek legal advice if they are uncertain about where to file their state returns.
Eight states do not levy a tax on earned income. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming. Tennessee requires a taxpayer to file a return if the taxpayer's legal domicile is in Tennessee and if the taxpayer's taxable interest and dividend income exceeds certain thresholds. However, the Servicemembers Civil Relief Act provides that military members may be taxed only on their military pay by their state of residence. The question of residency therefore assumes great importance because states are generally eager to tax as many individuals as possible.
A rule of thumb is that a military member remains a resident of the state from which he or she joined the military unless the military member has taken steps to become a resident of another state. This rule does not apply to non-military spouses. They usually are considered residents of the states in which they live. Also, if a military member has a nonmilitary income, the state in which he or she lives may tax that income even if the military member is a resident of a different state.
There is no magic formula to determine whether a taxpayer is a resident of one state or another. The general rule is that legal residency is established when an individual is physically present in a state AND intends to permanently reside in the state. "Intention to permanently reside" can be shown in several ways: by ownership of real property, voter registration, vehicle registration, driver's license and declaration of legal residence on legal documents (including DD 2058, used by the military).
One of these factors by itself would probably not be enough to change residency, but if a military member moved to a state and registered to vote, bought a house, registered a car, got a new driver's license and registered children in local schools, that military member would most likely be considered a resident of the new state.
If you have further questions regarding this or any other tax-related issue, call the Presidio's Tax Center at 242-7365. The Tax Center offers free preparation of both state and federal tax returns for qualified military personnel, family members and retirees. The Tax Center is located in at the Presidio's Building 254. Business hours are from 8 a.m. to 4 p.m. Monday through Friday.