01/21/2010
A friend of our practice called a few weeks ago, concerned that his daughter might be breaking the law. She is in the military and is currently stationed in Florida. She loves Florida and wants to make it her home – someday. She told her dad that she could declare that Florida was her official domicile from now on and that no matter where she was stationed, and no matter that she did not own a house in Florida, she could treat it as her permanent tax home-her domicile. Florida has gorgeous beaches, lots of sunshine, and no state income tax. So , what’s not to love about a permanent domicile in Florida? Sounded fishy to her dad. But it is the truth.
Military personnel move often from one duty station to the next. The Service Members Civil Relief Act, which has been around for a long time, allows military personnel to select a permanent domicile – the state they “intend” to settle in, if given the chance. While the point of this law was to simplify the legal life of the service member (ie voter registration , driver’s license, car registration etc), is it any real surprise that military personnel often select states that have no income tax (TX, FL, WY for example) or have taxation that favors military service (IL, AZ for example)? It is probably an unintended consequence of the law, but it is perfectly legal.
But what about the service member’s spouse? If he or she moved to be with the service member spouse, the nonservice member spouse was subjected to the laws of the new state of residence. That included the need for new voter registration and new driver’s license and the obligation to pay tax in the new resident state.
Enter new tax law The Military Spouses Civil Relief Act (P.L. 111-97). Retroactive for all of 2009, the new law states that a military spouse will not have lost domicile in the “home” state or acquired domicile in a new state “solely” because he or she moves to the new state to accompany a service member spouse to a new duty station. The law makes clear that a military spouse’s earned income cannot be taxed by a state if the military spouse is living and working in the state “solely” to be with the service member spouse. Instead, the military spouse may maintain the original domicile. Key – “solely.” Also critical: the service member must be present in the new state “in compliance with military orders.” States are free to work out the details. For example, California states that the domicile of the service member and the spouse must be the same. Other states may not care. Spouses should get with human resources in their duty station states to change wage withholding information. Don’t be surprised if smaller companies don’t know about this new law. Be aware: If a domicile should be a state that DOES have income tax, the spouse will still be responsible to file a tax return and meet his/her tax obligation to the state of domicile (and not the state of current residence).
So, what IS a state of domicile? There is a good article at http://www.uscg.mil/MLCPAC/lDiv/docs/Residency.pdf — it is 10 years old, so some information is probably quite dated (and therefore dangerous for tax advice), but it still gives a good feel for what is and isn’t a domicile. Interestingly, a service member does not have to have an actual residence in the state of domicile, but should be registered to vote in that state, should have a driver’s license in that state, should do banking in that state, file a tax return and pay taxes in that state (if so required), register cars in that state, maintain legal documents such as wills in that state, and should record the domicile with his/her branch of service. And that means that the spouse should now do the same things to insure that his/her choice of domicile is allowed.
Bottom line here – spouses, do your homework before changing residency to domicile. Interestingly, a lot of states seem willing to overlook domiciling issues for allowable in-state tuition to colleges and universities, but don’t take that for granted – investigate thoroughly if you are impacted by in-state tuition issues. Another caution: in the event of divorce or death, the laws of your domiciling state may prevail and could be onerous. Before making decisions, you may want to seek both tax and legal counsel and you can probably get that help on base for free.