Military legal residence obstacles

[FEDUKE404]

I'm currently having a somewhat heated discussion with a couple of clients who are now in the military.

To make a long story short - Basically one person just "entered" military duty in mid-2010 from a FL location and now (surprise!) has the military income as being conveniently "taxed" by FL. (The person has lived his entire life in NC, and was even working/living there very shortly before donning the uniform.) Another current military member with a similar overall background is filing/paying NC taxes on the military income.

Although I explained the rules as I understand them, the response was more or less "everyone is doing it." I have since looked around a bit and it appears the military has to make at least a couple of inquiries to be sure no one is playing a tax avoidance game.

Excerpt from DD Form 2058:

The formula for changing your State of legal residence/domicile is simply stated as follows: physical presence in the new State with the simultaneous intent of making it your permanent home and abandonment of the old State of legal residence/domicile.

In most cases, you must actually reside in the new State at the time you form the intent to make it your permanent home. Such intent must be clearly indicated. Your intent to make the new State your permanent home may be indicated by certain actions such as: (1) registering to vote; (2) purchasing residential property or an unimproved residential lot; (3) titling and registering your automobile(s); (4) notifying the State of your previous legal residence/domicile of the change in your State of legal residence/domicile; and (5) preparing a new last will and testament which indicates your new State of legal residence/domicile.

Finally, you must comply with the applicable tax laws of the State which is your new legal residence/domicile.

Generally, unless these steps have been taken, it is doubtful that your State of legal residence/domicile has changed. Failure to resolve any doubts as to your State of legal residence/domicile may adversely impact on certain legal privileges which depend on legal residence/domicile including among others, eligibility for resident tuition rates at State universities, eligibility to vote or be a candidate for public office, and eligibility for various welfare benefits.

So.........I guess now we have a majority of folks in the military "from" FL or TX, and I should just ask the client when he "moved" and go forward???

For those of you who may have more military folks in your client base, what are YOU doing? Should I just "get with the program" and go forward?

FE

[Burke]

He is obviously playing the no-state-tax-resident game. I suppose the problem is, the military is showing TX on his W-2 and not withholding. So it goes to, was his intent to make TX his permanent residence, and did he do any of the items under DD2058. I would make him sign a statement to that effect specifically addressing each of those items listed. I had a TX move to NC, but he lived in TX for years, owned a home there, married there, etc and only moved due to a military transfer. Yours sounds like a no. NC does not take these situations lightly.

[AJsTax]

I have been through this with one

recently also.
There is a Federal law that says that if the active Military person's permanent duty station is not in the same state as his domicile the home state may not tax it nor may local governments from that state. The only ones that can be taxed by a state are the ones that are stationed in their home state. That is how the Tax dept in Ohio explained it to me.
My guy lives in Ohio, returns home nearly every night to Ohio but is duty stationed in PA. No state may tax it...

[Jesse]

NC does not take these situations lightly.

Nor does Wisconsin!

[taxmandan]

recently also.
There is a Federal law that says that if the active Military person's permanent duty station is not in the same state as his domicile the home state may not tax it nor may local governments from that state. The only ones that can be taxed by a state are the ones that are stationed in their home state. That is how the Tax dept in Ohio explained it to me.
My guy lives in Ohio, returns home nearly every night to Ohio but is duty stationed in PA. No state may tax it...

Do you have a cite? Our state does as you describe, but under state law. I was not aware there was any federal law telling the states they can't tax out-of-state military pay.

[Burke]

I think the Servicemember Civil Relief Act covers this and that is a federal law. Also see Military Spouses Residency Relief Act (S.475) signed into law by President Obama on 11/11/09.

[FEDUKE404]

States do have different approaches

recently also.
There is a Federal law that says that if the active Military person's permanent duty station is not in the same state as his domicile the home state may not tax it nor may local governments from that state. The only ones that can be taxed by a state are the ones that are stationed in their home state. That is how the Tax dept in Ohio explained it to me.
My guy lives in Ohio, returns home nearly every night to Ohio but is duty stationed in PA. No state may tax it...

You have the other side of the discussion, namely that the trend is (for PC reasons et al?) for a state NOT to tax its residents for military income they earn outside of their "home" state. I expect at some point most states will lean toward some exclusion of military pay. As for the "federal law" you cited....that must be breaking news for the folks in the NC Dept of Revenue. http://www.dornc.com/taxes/individual/military.html

North Carolina still taxes its "residents" (including active military duty folks stationed elsewhere unless in a combat zone) on the military pay. Hence the creative issues referenced in my first post here.

Here is a good link for the OH rules:

http://usmilitary.about.com/od/taxes/a/ohio.htm

It is my understanding that for a very long time states have not been able to impose their own state taxes on military members who are on active duty within their state but have a "permanent home" elsewhere. (Don't give CA any more ideas to find some money....). There has been a distinction between taxation of the military pay such a person owns versus taxing income from a part-time job while on active duty, but even those lines are now beginning to blur.

Geez - I thought I was supposed to be a tax person and not a lawyer having to keep up with all these twists and turns. And then add some military folks who, to even the most casual observer, are likely gaming the system and, apparently, usually getting away with it. Somewhat reminds me of a few of those (long-gone!) EITC clients!

Oh well.....

FE