Tax Planning for Military Personnel and Spouses
Understanding the impact of the Servicemember's Civil Relief Act (SCRA) and in more recent years the Military Spouse Residency Relief Act (MSRRA) acts on your tax return can result in thousands of dollars of tax savings. We will also cover other tax benefits afforded to our military personnel such as nontaxable pay and benefits, nontaxable combat pay and its impact on IRA contributions and EITC, and automatic extensions.
Home of Record vs. Domicile
Home of Record
What is it? The place where a service member enlisted or was commissioned into the military.
Why is it important? Used primarily for military administrative purposes.
Your Home of Record does not change throughout a military career unless the service member requests a change.
Domicile
What is it? The state where a person has their permanent home and intends to return to or remain in.
Why is it important? Crucial for tax purposes, as it determines which state can tax the military member's income.
Your Domicile can be changed based on various factors, including intent to establish a new permanent home.
Impacts of SCRA and MSRRA on Domicile
Servicemember's Civil Relief Act (SCRA)
Allows service members to maintain their domicile in their home state, even when stationed elsewhere.
Protects service members from having to pay income taxes to multiple states.
Service members pay income tax only to their state of legal residence (domicile), regardless of where they are stationed.
Military Spouse Residency Relief Act (MSRRA)
Extends similar protections to military spouses.
Allows spouses to claim the same state of domicile as the service member for tax purposes.
Spouses can maintain this domicile even if they move to different states due to military orders.
Issues at the State Level
There are various issues to watch for at the state level, including:
States incorrectly taxing military pay of non-resident service members.
Failure to recognize MSRRA protections for military spouses.
Improper allocation of income between states for partially resident years.
Misunderstanding of domicile rules for military personnel.
Special Tax Provisions for Military Personnel
Certain Pay and Benefits are considered Nontaxable—
Basic Allowance for Housing (BAH)
Basic Allowance for Subsistence (BAS)
Certain travel allowances
Family separation pay
There are effects of Combat Zone Tax Benefits—
Exclusion of combat pay from taxable income
Impact on IRA contributions
Effect on Earned Income Tax Credit (EITC) calculations
Moving Expense Deductions may effect your taxes—
Available for certain unreimbursed moving expenses
Often, there are Deadline Extensions on your annual tax return—
Automatic extensions for filing and paying taxes when deployed
Combat zone extensions
If you go to sell your Primary Residence—
Special considerations for the five-year ownership and use test
Earned Income Tax Credit (EITC) can be effected—
Option to include nontaxable combat pay as earned income for EITC purposes
This should be considered carefully
Those in the Reserve and National Guard may have additional Travel Deductions Available—
Unreimbursed travel expenses over 100 miles
Wrap Up
Understanding the nuances of military tax planning, particularly the implications of SCRA and MSRRA, is crucial for maximizing tax benefits for service members and their families. By correctly applying these laws and utilizing the special tax provisions available, military personnel can potentially save thousands of dollars in taxes and ensure compliance with both federal and state tax regulations.
