Transition Tax Topics: State Taxes

- Welcome to Curt's Chalk Talk, the transition tax topics series. I'm Curt Sheldon with C.L. Sheldon and Company and today I want to talk to you about something you may have heard of, state income taxes.

Now, the reality is most of us, while we're on active duty, are able to establish residency without income taxes. That will change when you retire, and more importantly, it could change even before your official retirement date.

Now, let's say you're a Texas resident working in the Pentagon, you have my sympathies, and living in Virginia. Your official retirement date is the first of September, but you start terminal leave in June and start working for a local company in July. You assume that since you're a Texas resident, you don't have to pay any Virginia income taxes. You'd be wrong. Virginia has the right to tax that income as a non-resident.

The Service Members Civil Relief Act only applies to your military pay. So any compensation you earn inside Virginia that is not military compensation is subject to Virginia income taxes and you would be required to file a non-resident tax return for the income during that period. Then once you become a resident Virginia, basically your retirement year, your retirement date, you would file a part year return for the remainder of the year.

Now, interestingly this does not apply to your spouse. The spouse carve out under the Service Members Civil Relief Act and the Military Spouse Relief Act does not limit it to military compensation. So your spouse, if working and earning income inside Virginia, will still be able to be a Texas resident for tax purposes and will not have to pay taxes on the income until your official retirement date.

Are you a little concerned about your finances as you make the transition from active duty to the civilian world? Well check out our checklist. You can get it at www.clsheldon.com/tax. That's a financial checklist at www.clsheldon.com/tax and oh, by the way, it's free.