Wasn’t Active Duty great? You just needed to PCS to a state with no income tax, establish residency and not have to worry about state income taxes for the rest of your career (except if you work on terminal leave…see the article below). Well that ended the day you retired. You’re now subject to state income taxes. But in which state? It isn’t quite as simple as you might think.
The Standard Case
In the standard case, you pay income taxes to the state where you conduct the work. For most of us, this is the state where we live. But what about if you travel for work? Technically, if you travel for work, the state where you earn the income has a right to tax the income. If you’re curious and want to see how aggressive the states are about this, google the term “jock tax”. In reality, most people don’t pay taxes for work conducted while traveling for their employer and most states don’t go after them. I’m aware of a one time though when states do go after the “small guy” and it has to do with airlines. In the case of at least one airline, the state knows that all their simulator training is conducted in that state and even though they can’t tax the wages earned while flying out of the state, they certainly can and do tax the wages earned while going through training and flying sims. While the individual wages subject to taxation isn’t a huge amount like in the case of the “jock tax”, when you have a whole bunch of people going through training, the revenue for the state can be significant.
A Common Exception
Under certain cases, you may still pay income taxes to your resident state even though you work in another state. This applies when the states have a tax treaty where the they agree to allow the state where residency is maintained to tax the income. That applies here in the National Capital Region where Maryland, Virginia and the District of Columbia agree that the resident state will tax the income.
What about Virtual Work?
The general opinion is even though the company you work for may be located in another state, you are working in your residence state and the state where you are a resident has the right to tax the income. There are a handful of states (DE, NE, NY, NJ, PA) that may tax a non-resident who works virtually for a company located in those states. It will come down to whether the virtual work is necessary or convenient.
Things Change After You Retire from the Military
Throughout your time in the military you dealt with Federal Income Taxes and you’re probably pretty comfortable with them. That might not be the case when it comes to your state taxes. Plus, you have some unique issues based on your military pension and VA Disability Compensation. You might want to work with a financial and tax professional that deals with situations like yours each and every day.
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