SCRA and Military Spouses for State Taxes

SCRA has been amended (again), and it will change the way that many service members and their spouses pay state income taxes. SCRA and military spouses is a (relatively) new relationship, and changes are happening pretty regularly. It can be hard to keep up.

But first, a little background. Before we got to where we are today, there were two prior pieces of legislation that amended SCRA and impacted military spouses.

2009 Military Spouses Residency Relief Act

The 2009 Military Spouses Residency Relief Act (MSRRA) was an amendment to the Servicemembers Civil Relief Act (SCRA). It allowed military spouses to retain a previous state of legal residence, as long as it was the same state of legal residence as their active duty spouse. This was great for families who were able to live together in their desired state of legal residence. But did nothing for families who had never been stationed there together. This created a two-tier system. Some military spouses benefited from the law and other spouses still needed to change their legal residence with each move.

The Veterans Benefits and Transition Act of 2018

A later change tried to solve the problem. The Veterans Benefits and Transition Act of 2018 has a provision that states:

“For any taxable year of the marriage, the spouse of a servicemember may elect to use the same residence for purposes of taxation as the servicemember regardless of the date on which the marriage of the spouse and the servicemember occurred.”

What that meant was that spouses who did not share their service member’s state of legal residence could “borrow” that state of legal residence for purposes of taxation. (Also voting, in a different provision.)

For some reason, Congress felt that needed to be further extended. Which brings us to this new law:

Veterans Auto and Education Improvement Act of 2022

This brand-new provision was passed into law on 5 January 2023. (Yes, despite saying 2022 in the name. It took a while.) Clearly, someone in Congress knew about it, but it was a surprise to the military personal finance community.

Under this law, the SCRA was further amended. Here’s the exact wording in the law:

SEC. 18. RESIDENCE FOR TAX PURPOSES.

Section 511(a) of the Servicemembers Civil Relief Act (50 U.S.C. 4001(a)) is amended by striking paragraph (2) and inserting the following:

“(2) SPOUSES.—A spouse of a servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the servicemember in compliance with the servicemember’s military orders.

“(3) ELECTION.—For any taxable year of the marriage, a servicemember and the spouse of such servicemember may elect to use for purposes of taxation, regardless of the date on which the marriage of the servicemember and the spouse occurred, any of the following:

“(A) The residence or domicile of the servicemember.

“(B) The residence or domicile of the spouse.

Why We Care

This change may save military families money by allowing them to pick where they file state income taxes. Under the old law, the only options were the service member’s state of legal residence, or the spouse could use the state where they actually lived. Now, they can use the state of legal residence of the spouse. If it has lower income taxes, that would save money.

There are also other reasons why you might want to pay taxes in a particular state. In particular, that is often a criterion for eligibility for in-state tuition for college students.

The law also makes it possible for a military spouse to maintain a prior state of legal residency even if it isn’t the same state as their active duty service member.

The Problems With The Current SCRA and Military Spouses

There are numerous issues that aren’t addressed in this law. Heck, there are still some questions unresolved from the old versions of the law.

First, there is the question of the federal government’s right to tell states who can be residents there. It seems a stretch for the federal government to be able to tell states, “Hey, let this person vote in your state,” when the person in question may never have even set foot in that state. However, this has been the law since 2018 and I haven’t seen any pushback yet.

Second, voting and taxation are the two main indicators of legal residence. If you let someone pay taxes (or not pay taxes) and vote in your state, doesn’t that make them a legal resident of that state?

Be Clear and Consistent

Most important is the question of whether states will start looking more closely at the service member’s state of legal residence. Was it was legitimately established? Has the service member has been consistent in demonstrating his or her intent to keep that state as their legal residence?

We all know service members that are claiming one state as their legal residence, but titled and registered their vehicle in a different state, and maybe vote somewhere else. I’ve long held that states would increase their cracking down on such behavior, particularly as states are seeking new revenue and technology makes it easier to cross-reference individual actions. It makes sense that a state who is going to lose the revenue of a military spouse, as well as the service member, would ask for “proof” that the service member is actually a resident of the state they are claiming. There have always been some cases, but I think they will increase with this new law.

The tax professionals I know expect states to push back against this law. But, we all thought that about the 2009 and 2018 versions, and it didn’t really happen. I’m starting to wonder if the states have given up.

Questions We Don’t Have Answers For

Is this retroactive for 2022 taxes?

The law does not specify an effective date for this provision. Until some further guidance comes out, it is my opinion (not advice) that you’re going to have to figure this out with your tax professional.

Can I get a driver’s license in my spouse’s state of legal residence?

This law contains no provisions for obtaining a driver’s license. Some military spouses have been successful obtaining driver’s licenses in their active duty spouse’s state of legal residence.

What The Professionals Are Saying

The tax professionals I know are either skeptical or baffled. One told me, “apparently anyone can just pick anywhere now.” Obviously, that’s an exaggeration, but this does give a sense of how this whole thing feels a little out of control. Another friend really thinks California is going to push back on this. And I can’t possibly imagine that tax software is set up to handle this.

We shall see.

Why I Keep Saying SCRA Instead of MSRRA

A lot of people are confused when I refer to this legislation as the Servicemember’s Civil Relief Act, instead of the Military Spouses Residency Relief Act. That’s both understandable, but it’s time to move forward.

The MSRRA, as discussed above, was only the first of the three pieces of legislation that discuss this topic. More importantly, MSRRA wasn’t free-standing legislation. It was always an amendment to SCRA. SCRA is the underlying legislation. The two additional laws also amended SCRA. They didn’t amend MSRRA. Sending people to MSRRA is sending them to an old law.

Therefore, referring to these types of legislation as MSRRA is outdated and inaccurate. The underlying law has always been SCRA. Let’s call it that.

Questions? Comments? Crazy ideas?  Let me hear them!