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Active Duty Military, Do You Really Understand Your State Income Taxes?

Taxes

The Servicmembers Civil Relief Act (SCRA) theoretically makes the life of servicemembers a little easier. One of the ways it does that is allowing you to keep your state of residence for income tax when you enter active duty. You also have the option of establishing residency in a state where you are stationed. But the exact impact on your tax picture is a little cloudy. Let’s take a look at a few options.

You Maintain Your State of Residence Throughout Your Military Career

Under this scenario you may not notice any change to your state income taxes, especially if your resident state doesn’t have an income tax. But many states don’t tax your military pay if you are a resident stationed in another state. More than a few military members assume that in this case, there is no requirement to file a state tax return in their resident state. That could be a mistake. Here is an example. Pennsylvania does not tax military pay of Pennsylvania residents stationed outside PA. That might lead you to the conclusion that if you’re stationed outside of PA, you don’t need to file a return as long as DFAS didn’t withhold PA taxes from your pay. That would be a mistake. Only your military pay is excluded from taxation and if you have more than $33 in other income (interest, dividends, capital gains as examples), you must file. Since PA has virtually no deductions, you’ll probably owe taxes on the income as well. Most states that exclude military pay from income for residents stationed outside of the state only exclude the military pay from taxation. That would mean income earned by a spouse, if your spouse is a resident of the same state as you are, would not be excluded and investment income likely wouldn’t be either. You’ll need to check and see if the other income puts you over the filing threshold for your resident state.

You Change Your State of Residence During Your Military Career

I did this. A lot of people do. It’s hard to pass up eliminating state income tax. As before, the devil is in the detail. While Florida, Texas and Nevada are popular choices, there are few outliers that you’ll want to make sure you understand. Tennessee is an example. Tennessee doesn’t tax wages, so it can be an attractive choice. It does however tax dividends from stocks and interest from bonds and notes. The tax starts on the income that exceeds $2,500 for those who file as a married couple ($1,250 for single). So if you have significant investment income you may owe this tax, even if you don’t live in the state.

You Serve an Assignment as a Geo-Bach

When I went to Air War College there were several of my classmates that didn’t move their family with them to Montgomery, Alabama. The course is slightly less than one-year long and most of them had kids in or approaching high school. It didn’t necessarily make sense to move the kids for one year. That could cause a problem if your spouse is claiming you state of residence as allowed by the Military Spouse Residency Relief Act (MSRRA). MSRRA specifically states that you and your spouse must live together for him or her to continue to keep your state of residency. So, if you take an assignment (accompanied) and your spouse doesn’t come with you, your spouse would gain residency in the State where he or she resides. If your spouse has wage income, that income could become taxable.

Military Finances are Different

A lot of things finance related are the same for active duty military members and civilians. A significant number of things aren’t. We think that if you’re going to work with a financial advisor, you should work with one that knows the unique rules and opportunities that apply to your current or previous military service. If you’d like to find out how we work with current and retired military members, give us a call.


If you found this article useful, you might like the following blog posts:

Retired Military Finances 201: Remote Work and State Income Taxes


Planning on Working on Terminal Leave? Mind Your State Taxes


Retired Military Finances 101: State Income Tax





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