There seem to be few things as confusing as state of legal residency as it applies to military service members and their spouses. Even the professionals are often under-informed or confused. As we see in this email I received:
I am a CPA in CA. I have a client in the Marines. His “home state” is TN. However, he has lived in NC for 3 years now and purchased a home there. I have been researching where he has to pay state income tax. It appears to me that he has to pay where he is physically located. He disagrees with me and believes he only has to claim TN. His wife works and lives in NC as well.
Any light you can shed on this would be greatly appreciated!
Sigh. I honestly expect tax professionals to be more knowledgeable about this. Here was my response:
Under the Servicemember’s Civil Relief Act (SCRA), an active duty service member is permitted to maintain their state of legal residence even when physically located elsewhere due to Permanent Change of Station (PCS) orders. Therefore, the question is whether Tennessee is actually his state of legal residence. While there are numerous indicators of state of legal residence, the “big three” are voting registration (and actually voting), maintaining a driver’s license, and registering motor vehicles. Where does he do those things? What other indicators does he have, and where are they located?
Simply purchasing a home in North Carolina does not invalidate his legal residency in Tennessee. However, if he has changed a variety of other demonstrations of residency to North Carolina, or he has things all over the place, then it becomes complicated.
For his wife, the question is similar but with a small twist. The federal law, the Military Spouses Residency Relief Act amended the SCRA to give military spouses two ways to claim their active duty service member’s state of legal residence for purpose of taxes. The first was is if the military spouse had legally established that same state of legal residence, they may continue to maintain that legal residence, as long as it matches the state of legal residence of the active duty member. The second way is that military spouses are permitted to use their active duty spouse’s state of legal residence for purposes of taxes and voting without actually establishing their own legal residence in that state.
However, many states have more generous laws and permit military spouses to maintain their legal residence even if it does not match that of the service member.
It might be useful to know that your client may have heard many stories of folks who aren’t actually well-documented legal residents of a state claiming it for tax purposes, and most will get away with it. That can make it difficult to convince folks what the rules actually say. It can get particularly tricky when the service member or spouse has muddied the waters, voting in one state, holding a driver’s license in another, and registering their vehicles elsewhere.
Hopefully, this tax professional will take a little time to read up on SCRA and how it applies to military members and their spouses. It can be a little confusing, but it’s not really THAT hard. And it’s important stuff, whether you’re the tax professional or the military family trying to figure it out.