The states with income taxes (currently 44 of them) do not have uniform rules for their treatment of military personnel. They are all different to one degree or another. Many service members find the state treatment of taxes confusing. You shouldn’t find it alarming if you do. I study taxes and I find it difficult to understand some of the different rules. They use words like resident, non-resident, and domicile, and they sometimes don’t mean the same thing from one state’s laws to the next.
When it comes to state taxes, I deal most frequently with Virginia. Fortunately, I find the Virginia instructions easier to understand than most of the other states. Virginia taxes income somewhat aggressively (fewer deductions), but at least you don’t need a law degree to understand the instructions on their website.
The biggest concern military families face when living in Virginia are the residency laws. I’ll try to explain Virginia’s residency treatment of military personnel as succinctly as possible.
Residency: In Virginia you are classified as either a resident or a non-resident. Residents pay taxes. You can live here and not be a resident. If you are in the military it depends on your official “Home of Record”. Usually this is the state you were living in when you joined, unless you changed it at some point. When I first joined my home of record was my home state – Ohio. When I was stationed in Florida I changed my home of record to Florida (one of the states with no income tax). Then I moved to Virginia, but I remained a Florida resident until I retired from active duty. The Soldiers and Sailors Civil Relief Act prevents the states from automatically making military personnel residents and taxing them.
Military spouses are a little trickier. When we first moved here in 2001 my wife was considered a Virginia resident as soon as she was employed. Although we were married in Florida and she was a Florida resident when we moved, she was not covered by the Soldiers and Sailors Civil Relief Act.
Things have changed since Tade and I moved here. In 2009 Congress passed the Military Spouses Residency Relief Act. Under those rules Tade would have remained a Florida resident. Under Virginia law, as long as the spouse has the same legal state of residence as the service member, they are considered non-residents and do not pay Virginia state income taxes.
Note that caveat – must have the same state of residence as the military member. If I kept Ohio as my Home of Record, married Tade in Florida and moved her to Virginia, she would not be protected by the Military Spouses Residency Relief Act. Since she was not an Ohio resident she would become a tax-paying Virginian.
It is typically more advantageous for married persons to use the married filing jointly (MFJ) filing status on their federal tax return. When one spouse must pay income taxes in Virginia and the other does not the most advantageous way to file the Virginia return is to use the married filing separately (MFS) filing status. AS I have previously written, most tax software does not like it much when you file your federal and state returns using different filing statuses. Many people run into problems with that scenario – and, frankly, it isn’t even terribly complex.
Consider this couple. A sailor from Florida gets stationed in Illinois. While there he marries an Illinois resident. Then they PCS to Virginia. She owns a house in Illinois, which she rents out while they are living in Virginia. She gets a job in Virginia. Because she does not have the same state of residence as her husband Virginia considers her a Virginia resident, and Virginia state income taxes are withheld from her pay.
Husband owes no state income taxes, but wife owes state taxes in both Virginia and Illinois (for the rental income). They file their federal taxes MFJ. She files a Virginia return MFS. Illinois law also allows MFS filing for spouses that file MFJ federally (http://www.revenue.state.il.us/Publications/Pubs/Pub-102.pdf).
That was one of those returns that takes quite a while to prepare because of the intricacies of the state tax laws and the inflexibility of the software. If you have a return like that, bring it to me, we’ll figure it out.