Tip to Help Military Families Save on Taxes

military spouse state income tax

Military Spouse State Income Tax

The Veterans Benefits and Transition Act of 2018 allows military spouses to choose the same state of legal residence as their service member. The new rules covering the military spouse state income tax would apply to local taxes and would also apply for voting purposes. All of this even if they have never lived in that state.

How Does Military Spouse State Income Tax Work?

Let’s say a military spouse from California marries a service member from Texas. They are stationed in California and she has a full-time job. Tax time comes and while her husband is a resident of Texas, a state without personal income tax, she has to file in California, a state with the highest personal income tax.

She has never lived in Texas, and they have never been stationed there before. They also have no plans to move to Texas after military service.

Up until December of 2018, the spouse would have to file in California, even though her husband was a resident of Texas and filed there. A new law went into effect, and it will make it so some military spouses will receive a bigger tax refund.

States with No Personal Income Tax

If your spouse is a resident from any of these states, then you may be in luck. According to TurboTax.com, these states do not have a personal income tax.

  • Wyoming
  • Washington
  • Texas
  • South Dakota
  • Nevada
  • Florida
  • Alaska

New Hampshire and Tennessee only tax interest and dividend income, not wages, earnings or other income.

Pennsylvania’s 3.07 percent flat tax ranks as the tenth lowest in the nation for 2019.

Personal Income Tax Top 10 Highest States

41 states and Washington, DC levy a personal income tax.  If you’re from one of these states, there’s a good chance savings may be possible for you.

Please note that each of these states has a personal income tax floor, deductions, exemptions, credits and varying definitions of taxable income that determine actual payment.

The 10 highest income tax states for 2019 are:

  • California 13.3%
  • Hawaii 11%
  • Oregon 9.9%
  • Minnesota 9.85%
  • Iowa 8.98%
  • New Jersey 8.97%
  • Vermont 8.95%
  • District of Columbia 8.95%
  • New York 8.82%
  • Wisconsin 7.65%

TurboTax notes that “low personal income tax rates can be misleading; a lack of exemptions and deductions can raise the effective rate you pay.”  Please keep that in mind.

Wait…Hasn’t This Always Been the Case?

But wait…hasn’t this always been the case? No, before, due to the Military Spouse Residency Relief Act in 2009, spouses could change to the legal resident of their service member spouse, but would have had to establish a physical presence in the state they want to become a resident of and have an intent to remain in the state permanently.

In the case of the couple mentioned above, the spouse would have had to have lived in Texas at some point. Now, after this change, they will be able to claim residency without having to live there or have plans to move there in the future, as long as their spouse has residency in the state.

Applies to Tax Year 2018 and beyond for Military Families

Since this change is retroactive to 2018, military spouses who change their residency from a state with an income tax to a state without one, or to a state with a lower rate, will receive a tax refund of the taxes they already paid. This will, of course, depend on the state’s tax requirements.

Because of SCRA, The Servicemembers Civil Relief Act, service members can maintain their legal resident as they move around during their career. If they are from Texas, they will pay taxes to Texas, vote in Texas, and won’t have to pay taxes in the state they are currently stationed in. This tax change will allow the spouse to do the same.

For more on state-provided veterans’ benefits, please visit CollegeRecon’s State Veterans’ Benefits page.

Decision About Residency Required

Because of this change, military spouses need to make a decision about if they will change their residency, and if it would be worth doing so. For some, changing their residency wouldn’t be. Sitting down and looking over the different tax rates for each state would be a good idea, in order to make the right decision.

Expect Some Bumps With the Change

Since this change is so new, states might not be fully aware of the change, so spouses should file in both states if they are going to make a change. They should later then receive a refund. Spouses should also notify their employers going forward.

Military couples can go to legal assistance on their military installation to help figure out what would be best for them.

There is some worry that state tax authorities will see that they are no longer getting the tax from military spouses who live and work in their state and that could lead into the state looking into whether or not the service member is a true legal resident of that state, so it would be a good idea for service members to make sure everything is the way it should be as far as what state they are a resident of.

A Change for the Better

Another benefit to this change is that it will be easier for military couples to file in the same state and that will save a little bit of tax time headache. While it might take a bit to sort everything out, this change will be for the best and will allow military spouses to benefit from the tax laws of the state their service member is a resident of.

UPDATE: The IRS Updates Military Tax Benefits Guide

Good news for members of the military. The IRS has released a newly-revised tax guide to help members of the military understand the different tax benefits under the law.

This guide was posted on the IRS.gov website with useful tips for all members of the military, including reservists and the national guard. There is very important information in this guide, such as what the special benefits for those serving in a combat zone are and figuring out refunds as well as reservist-related travel expenses. Basically, anything you need to know as a military service member.

You can see the new guide here!


About the author

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Julie Provost is a freelance writer, blogger, and owner of Soldier's Wife, Crazy Life, a support blog for military spouses. She lives in Tennessee with her National Guard husband and three boys.