Alabama Residency - Military

[Burke]

TP has been transferred to AL due to military orders. However, he has bought a home and vehicle in Alabama, and his wife is now working in Alabama. Does this make them residents for Alabama state tax? (I know the spouse must file since she probably had AL withholding.) His W-2 has shown another state (no income tax) for years and they have not been withholding anything, even though they have been living all over the place, always on a military base or renting.

[Snaggletooth]

They are in a "Catch 22"

Burke, there is good and bad in Alabama. If they were not Alabama residents ALL year, they are required to file a "Part-Year Resident" return. The allocation of income depends on when they actually received income, and not some percentage apportionment formula such as occurs in other states.

The Alabama income is subject to Alabama tax, and the deductions from income (which are substantial in AL) are also predicated on relevant dates when the deductions occurred. Believe it or not, Alabama allows a deduction for Federal Income Tax liability, and THAT deduction is apportioned. The deduction is before Other Taxes, Payments, and some Refundable credits, and is based on the liability only (not adjusted by refunds or extra payments) There is a worksheet for the Federal Tax deduction.

Alabama also allows a credit for "Taxes Paid to Other States", however, if he has not paid any tax to a state, then this is of no benefit.

Also, it sounds like he has another terrific benefit. Military retirement is totally exempt, and there is a line for retirement on the reverse of their individual tax forms to recognize this exemption. Also, hundreds of commercial corporations have their retirement exemption for some reason, and Alabama provides a list that will not be in the instructions, so be aggressive if there is any such corporate retirement.

Just from where I sit, I think his Alabama tax for 2015 will be minimal, or maybe even non-existent.

[David1980]

If they're treated as residents of a state with no income tax that's a pretty fantastic benefit for a military couple. Under the military spouses residency relief act (MSRRA) you could even avoid state taxation on the wife's income, assuming she shares the same domicile in that other state.

With the military taxpayers, you kind of have to look at where they consider their home to be. Someone posted in my state that is going to return to their original state once they're done with the military would remain domiciled in that original state. On the other hand if they want to stay here after they're done with the military their domicile is probably this state.

[Burke]

If they're treated as residents of a state with no income tax that's a pretty fantastic benefit for a military couple. Under the military spouses residency relief act (MSRRA) you could even avoid state taxation on the wife's income, assuming she shares the same domicile in that other state.

Yes, that is the quandary. He established residence in a no-tax state where he was first stationed when he joined the military. He is still active duty as far as I know, but perhaps he is planning to retire in AL eventually. Need to question further. Her income is probably exempt, but it is difficult to get the employers not to withhold tax, so almost always have to file a NR. And military payroll personnel are even worse about changing anything. I have to get a VA refund every year for another one who established residence in TX.

[FEDUKE404]

Home of record is most important issue

TP has been transferred to AL due to military orders. However, he has bought a home and vehicle in Alabama, and his wife is now working in Alabama. Does this make them residents for Alabama state tax? (I know the spouse must file since she probably had AL withholding.) His W-2 has shown another state (no income tax) for years and they have not been withholding anything, even though they have been living all over the place, always on a military base or renting.

It's been my long-time understanding (including when I was in the Army!) that the home of record of a military person determines his state income tax issues.

For all intents and purposes, AL should have no claim on his income but his "home state" would. Things get a bit more complicated for the non-military spouse of a military person (state rules differ?) so you will need to do some AL-specific research on that aspect.

The only time things get sticky is when a military person "conveniently" enters the military from a non-income tax state, such as FL, so as to avoid any future state income tax while in the military. Many (most) states have caught on to that diversion when it is a scam and eventually send a "Dear Soldier" letter to the address the IRS has on file. A NC acquaintance I know decided he was living with a cousin in TN when he went active duty, although everything he / his family owned (home/cars/voter reg/etc) clearly showed NC was his home. I think the military also has some "paperwork" that residents of non-tax states have to sign to certify they really WERE bona fide residents of said state.

Sorry to go on a rant. Bottom line is soldier should face no AL tax, and his wife's wage income may or may not be subject to AL tax (probably will not). As for unnecessary withholding, most state equivalents of Form W-4 have (somewhere) a box to check stating employee is an active duty military person (or spouse??) and is exempt from state withholding. (Saves filing an unneeded state tax return. . .)**

Hopefully this link is OK --->>> http://www.dor.state.nc.us/taxes/ind.../military.html as it explains the NC rules. It should be noted that not all income can escape the "temporary" state taxation.

Here is another link --->>> http://www.dornc.com/taxes/individua...q_spouses.html

**I could not find where/how to tell employer you are "exempt" from state withholding...forms changed??...but I'm sure it's out there somewhere.

Good luck.

FE