Military Law Newsletter - Spring 2012
State Income Taxes: Legal Residency Still Required!
LT Keven P. Schreiber, JAGC, USN
BLUF: The Servicemembers Civil Relief Act (SCRA) allows servicemembers and their spouses to retain their legal residency for tax purposes if the military makes them move to another state, but servicemembers must actually keep that legal residency by retaining sufficient “contacts” with the state. Failing to do so may result in a legal residency change, payment of back taxes, and tax penalties by states looking for money in these tough times.
To what state do you pay state income taxes? If you said “I don’t pay income taxes,” then your Leave and Earnings Statement (LES) probably says you’re from one of the six states that don’t have state income tax (AK, FL, NV, SD, TX, WA, WY), or one of the several states that don’t tax military pay (IA or MT, for example). Most servicemembers know the benefits of being stationed in one of those states; once you’ve been there and established legal residence, you get an automatic pay-raise because you can keep more of your money. But what does it mean to establish legal residence? And more importantly, what does it mean to keep it? Both these questions are crucial to the understanding of your tax situation, can help you continue to enjoy beneficial state laws, and help you avoid paying back taxes and penalties in the future.
When we talk about legal residency for tax purposes, what we really mean is “domicile.” Physical residence should not be confused with domicile. Your residence is simply where you live right now, while domicile is where you are from and intend to return and remain. Most people think their domicile is their “Home of Record,” but that’s incorrect. The home of record is merely an administrative entry into your service record that notes where you entered the service, and helps determine where the military will pay for your goods to be returned upon your exit from the service. It has no bearing on your domicile.
Domicile can best be thought of as a collection of footprints. Anything in your life that could identify you with a particular state is a footprint in that state, and all of them combined serve to show where you’re from, and where you intend to return in the future. Examples include: where you own real property, where your car is registered, where your driver’s license is from, the state law referenced in your will, where you’re registered to vote, where you have personal or economic ties, where you physically reside, where you work (important for military spouses), where you attend school, where you do your banking, etc. Even though not all of your footprints may be in the same state, it is usually clear what state retains the balance of your life.
After considering your situation and determining your domicile, take a look at your LES. Do your domicile and the state to which you pay income taxes match? If not, you could have a problem. Domicile is what matters for state taxes, and if you’re not paying the state in which you’re domiciled, you could get a visit from the tax collector.
So how do you establish domicile and how do you keep it? Both acts are fairly simple. Imagine you just left boot camp, you are stationed in Jacksonville, FL, and you want to become a domiciliary in Florida so you can stop paying income taxes. To do that you’d need to put the various footprints of your life in Florida. Complying with relevant state laws, you could register your car in the state, register to vote, buy property, join a church or civic organization, take classes at a community college, get a driver’s license, etc. Essentially, if someone asked you, “where are you from?” you should be able to point to enough factors to convince them that if you left the military tomorrow, you would probably stay in Florida. Your actual intent to stay doesn’t matter, only the footprints matter.
Now that you’ve established domicile in Florida, how do you keep it when the military transfers you to Virginia? You must keep your footprints in Florida! Most of the factors that go into determining domicile are not dependent on physical residence in the state, so it’s easy to remain a Florida domiciliary, and continue to enjoy their tax laws.
In addition, the SCRA prohibits states from taxing you solely because of your presence in a state due to military orders. It also prevents you from losing your domicile because you moved to a new state on military orders. However, the SCRA does not prevent you from changing your domicile to the new state when you move. The law prevents the state from acting, but does not prevent you from changing your domicile and making yourself subject to a new state’s taxes.
To put it simply, you cannot establish domicile in Florida (or any other state) to avoid paying income taxes, then move to another state on orders, put all your footprints in the new state, and continue to claim Florida for taxes. The SCRA does not protect this kind of activity, and servicemembers who claim the wrong state for tax purposes could be in trouble if the state in which they are actually domiciled ever figures it out. In the current economic situation, states are strapped for cash and looking for ways to get it from their citizens. It is extremely important for servicemembers to use caution when moving if they want to keep their domicile in a state in which they do not reside.
The SCRA applies the same benefits and limitations to military spouses. Once a military spouse has legitimately established domicile in a state, he or she may keep that domicile if they wish, and not be taxed by another state simply because they reside there due to military orders. However, because a spouse can change their domicile if they wish, they should carefully observe the domicile factors, especially if they choose to work or go to school in a new state. Spouses should also keep in mind that they cannot “claim” the servicemember’s domicile if they themselves never established domicile there.
If you have questions about your domicile or where you should be paying taxes, please call your nearest JAG legal assistance office and set up an appointment to talk it over. Domicile and residence are also considered when drafting a will, so a JAG will be happy to talk to you about them during an estate planning appointment.