The Servicemembers Civil Relief Act Saves On Taxes

The Servicemembers’ Civil Relief Act (SCRA) provides military taxpayers with state income tax relief. The servicemember will not be taxed by multiple states or tax jurisdictions when the servicemember moves to a different state on account of military service, protecting the servicemember from double taxation.

The Military Spouses Residence Relief Act of 2009 (MSRRA) was enacted to expand the Servicemembers Civil Relief Act (SCRA) which exempted a military member’s income and property from being subject to taxation in multiple states.

Under MSRRA, the spouse of a servicemember neither loses nor acquires a state of domicile or residence for taxation purposes (both income and property) if the spouse meets the following three requirements:

1. The spouse accompanies the servicemember to a duty station state outside the home state to comply with military orders;
2. The spouse is in the duty station state solely to be with the servicemember; and
3. The spouse is domiciled in the same home state as the servicemember.

If these three requirements are met, the income earned by the non-military spouse while in the duty station state is not subject to taxation in that state, although such income may be subject to taxation in the spouse’s home state. Similarly, the spouse’s property is not subject to taxation in the duty station state.

Non-military income earned by the servicemember is still subject to taxation in the duty station state.

Examples:

Major Marjorie Smith and her spouse Bill Smith, a teacher at a local school, are legal residents of Texas. Major Smith receives PCS orders relocating her from Ft. Hood, TX to Ft. Bragg, NC. The couple moves to NC only to comply with Major Smith’s military orders. Bill obtains a teaching job at a local Fayetteville, NC school.

Under the MSRRA, neither Major Smith nor Bill are subject to NC income tax on either Major Smith’s military compensation or Bill’s teaching income. They are taxed according to the rules of their home state – TX. The couple’s jointly owned vehicles are also exempt from NC property tax.

Captain Sanders is an active duty servicemember and maintains residency in Florida. In 2004, while stationed in Missouri he married a geologist named Katie, who was from and maintained residency in Missouri. In 2009, Captain Sanders is stationed in Virginia, and the couple moves there. Katie wants to elect to have Florida considered her home state.

The MSRRA does not apply to Katie because Katie and Captain Sanders have different home states. Katie’s home state is Virginia, and not the same as Captain Sanders’s home state of Florida. Katie will not be able to elect her home state because residency and domicile are determined under state law. Katie will have to report any income earned in the state she was residing in when the income was earned. And currently, Katie is living and earning income in Virginia and her income will be taxed in Virginia.

Important: Individual states’ method of carrying out the MSRRA will vary. Information about individual states’ methods of compliance will be published when available. However, the application of the MSRRA to a particular taxpayer’s situation will depend on a lot of factors. A tax professional should research the taxpayer’s duty station state and home state departments of revenue websites for particular information on how the states comply with the new law.

By The Tax Institute at H&R Block