Military Spouse Exempt Pay

[Gary2]

(Note: The exemption only applies to the servicemember’s spouse. Any non-military
source income earned in Hawaii by the servicemember is subject to Hawaii income tax.)

Let me elaborate some more: While HI may only have this specific clarification, the MSRRA in general only applies to the spouse's earned income, i.e., wages, self-employment income, and that portion of partnership income subject to SE tax. As a trivial example, if the spouse owns a rental property in HI, then the rental income would not be exempt, and would be subject to HI taxes (assuming HI would normally tax such income of a non-resident).

MA goes to the trouble of elaborating further concerning sole-proprietorships owned by the spouse. A simple consultant-type Schedule C would also be exempt under the MSRRA, but anything that is either capital-intensive or relies on employees wouldn't. I look at it this way: If it's an amount you think could be excluded from SE tax under the right structure (e.g. an S-Corp), even though being a sole-proprietorship stands in the way of SE exclusion, then MA will argue that it's not exempt from state tax under the MSRRA.

I think I'm going to use this as another example of how small legal changes - the text of the MSRRA is quite manageable - can cause huge complications.

[taxea]

Hawaii Law

Tax Information Release No. 2010-01
May 3, 2010
Page 4 of 9
1. The servicemember (as defined in 10 U.S.C. §101(a)(5)) is present in Hawaii solely in
compliance with military or naval orders;
2. The spouse is in Hawaii solely to be with the servicemember; and
3. The spouse and servicemember are domiciled in the same state and that state is not
Hawaii.
(Note: The exemption only applies to the servicemember’s spouse. Any non-military
source income earned in Hawaii by the servicemember is subject to Hawaii income tax.)

[Burke]

Thanks for this link and info from Gary2 regarding DD Form 2058. I have a couple of guys I want to send this to and ask for their original one.

[FEDUKE404]

Forms and NC-4

The military has form 2058, which is the State of Legal Residence certificate. Massachusetts, for example, requires a copy of this form for the service member when the spouse claims exemption from MA taxes under the MSRRA.

I don't know what the military rules are for filing this form, but my understanding is that once accepted, then it's binding on the individual and the state (barring clerical errors). The versions that I've found online don't mention anything about notarizing, but give an explanation that's essentially similar to the common rules for change of domicile, i.e., physical residence plus a vague set of example actions to demonstrate intent to establish a new domicile and sever previous connections.

This is the form you mentioned and same I had last seen a couple of years ago:

http://www.dtic.mil/whs/directives/i...rms/dd2058.pdf

As for the NC rules (and I assume other states have similar guidelines), the process seems rather straightforward.

FE

[Gary2]

SIDE QUESTION: How difficult is it for the employers (let's assume WA resident is on active duty in NC and accompanying spouse works at a business in NC) NOT to withhold state taxes in the first place? I can envision local NC employers saying "You wanna do WHAT?!?"

See the NC FAQ on the subject, specifically item 12.

[Gary2]

As for changing the "tax home" for military personnel (it is quite convenient to claim FL or TX or similar origin) it is my understanding that some states, NC in particular, are quite aggressive in checking on NC residents who disappear from NCDOR tax records upon entry into the military. IIRC, the military has a form that must be signed/notarized where the person must state/certify the facts that justify changing home from state A to state B.

The military has form 2058, which is the State of Legal Residence certificate. Massachusetts, for example, requires a copy of this form for the service member when the spouse claims exemption from MA taxes under the MSRRA.

I don't know what the military rules are for filing this form, but my understanding is that once accepted, then it's binding on the individual and the state (barring clerical errors). The versions that I've found online don't mention anything about notarizing, but give an explanation that's essentially similar to the common rules for change of domicile, i.e., physical residence plus a vague set of example actions to demonstrate intent to establish a new domicile and sever previous connections.

[JohnH]

Things sure have changed over the years. Back in 1969-70, Michigan passed a law paying a bonus to any Michigan resident who was in the military or who was PLANNING to become a Michigan resident upon discharge. Amazing how many of my buddies suddenly decided Michigan was going to be the place to go after they got out. Changed their home of record and everything. Not so amazing was how many of them changed their minds again after they got the check and wound up returning to the state they lived in before joining.

[FEDUKE404]

Military cannot be taxed by foreign state

If the spouse is a resident of let's say NC (under MSRRA) and works in HI during the year, HI cannot tax the income earned in HI.

That's EXACTLY the way I understand things. (Maybe things are somehow perceived differently in HI ??)

Of course, it can cut both ways. Client (long-time NC resident, as is husband) will soon join husband who is on active duty in Washington State.

She/he will continue to pay NC income tax on their wage/other income, even though they are exempt from any WA state tax...which does not exist in the first place.

As for changing the "tax home" for military personnel (it is quite convenient to claim FL or TX or similar origin) it is my understanding that some states, NC in particular, are quite aggressive in checking on NC residents who disappear from NCDOR tax records upon entry into the military. IIRC, the military has a form that must be signed/notarized where the person must state/certify the facts that justify changing home from state A to state B.

SIDE QUESTION: How difficult is it for the employers (let's assume WA resident is on active duty in NC and accompanying spouse works at a business in NC) NOT to withhold state taxes in the first place? I can envision local NC employers saying "You wanna do WHAT?!?"

FE

[JoshinNC]

Agree with Gary

That changed in 2009 because of the Military Spouse Residency Relief Act (MSRRA).


Because of the MSRRA, you must look at both together. You can only separate the two after determining that the MSRRA doesn't apply.

on both points.

Did a large volume of research/studying on this subject early this season as I was advising a large volume of multi state military couples this year

[Gary2]

Still taxable to Hawaii. If spouse is employed or self-employed in Hawaii the income is taxable.

That changed in 2009 because of the Military Spouse Residency Relief Act (MSRRA).

But we are discussing the spouse not the military personnel.

Because of the MSRRA, you must look at both together. You can only separate the two after determining that the MSRRA doesn't apply.

[JoshinNC]

Not under Federal law

Still taxable to Hawaii. If spouse is employed or self-employed in Hawaii the income is taxable.

If the spouse is a resident of let's say NC (under MSRRA) and works in HI during the year, HI cannot tax the income earned in HI.

[taxea]

You can't change residency to another state without actually living in that state. For example, M enlists in CA and thus begins with CA as home of record. M gets stationed in TX, which allows M to change home of record and domicile to TX. M gets transferred again, and is now stationed in NY but gets to keep the TX home of record, so that none of M's military pay is subject to NY income tax. M falls in love and marries a New Yorker. That new spouse cannot claim TX as a home of record and thus cannot get any benefit from the MSRRA.

It's extremely common for military people to change their home of record to states without an income tax at their first opportunity. That rarely means they plan to return to that state upon leaving the service. TX is a counter-example, because there are good job opportunities there. AK is a prime example of a state where service members will claim residency with no intention of ever returning there.

But we are discussing the spouse not the military personnel.

[taxea]

I live in a large military area, and I get them from all over. Although the Federal law is the same for military spouses, the states all demand different methods to file for the exemption. Finding these obscure lines, obscure rules and necessary attachments to each state is extremely stressful, especially in the thick of the season.

Taxea, let's say the military spouse's home of record is the same as the servicemember, that spouse's income is not taxable to HI.

Still taxable to Hawaii. If spouse is employed or self-employed in Hawaii the income is taxable.

[KathMorgan]

TaxBook

The TaxBook also has a great product called The All States Book. I know how to get to the different state websites to do research if necessary, but my All States book is never far away. All of the states that have taxes lists a paragraph for military treatment and for the military spouse residency relief act information. It's really handy.

[Gary2]

As soon as the spouse becomes the spouse she/he should change residency to that of the person he/she married if it is to his/her benefit. He/she will, most likely, be moving there when the spouse in the service is done with his/her tour of duty.

You can't change residency to another state without actually living in that state. For example, M enlists in CA and thus begins with CA as home of record. M gets stationed in TX, which allows M to change home of record and domicile to TX. M gets transferred again, and is now stationed in NY but gets to keep the TX home of record, so that none of M's military pay is subject to NY income tax. M falls in love and marries a New Yorker. That new spouse cannot claim TX as a home of record and thus cannot get any benefit from the MSRRA.

It's extremely common for military people to change their home of record to states without an income tax at their first opportunity. That rarely means they plan to return to that state upon leaving the service. TX is a counter-example, because there are good job opportunities there. AK is a prime example of a state where service members will claim residency with no intention of ever returning there.