December 17, 2009
By Samantha L. Quigley
American Forces Press Service

WASHINGTON - A new law protects military spouses from being taxed for work performed in states where they're living outside their home states as a result of military orders.

President Barack Obama signed the Military Spouses Residency Relief Act, an amendment to the 2003 Servicemembers Civil Relief Act, on Nov. 11.

"This act, among other things, would provide that when a servicemember leaves his or her home state in accord with military orders, the servicemember's spouse may retain residency in his or her home state for voting and tax purposes, after relocating from that state to accompany the servicemember," the president said in a Nov. 12 White House statement.

The new law means a change in fundamental tax law for military spouses, said Army Col. Shawn Shumake, director of legal policy in the office of the undersecretary of defense for personnel and readiness.

"If a spouse accompanies a military member to a state that is not the spouse's [state of legal residence] and does so solely to be with the servicemember under military orders, then the income the spouse earns from services performed in that nondomiciliary state cannot be taxed," he said in a Pentagon Channel interview yesterday.

But, he warned, some states interpret the act to apply only if the military servicemember and the spouse live under the same roof. "A number of states believe that to get this tax break, or tax exemption, the spouse and the servicemember must have the same domicile," he said. "Different states interpret this possible requirement differently."

The law does not necessarily mean that someone who makes their permanent home in one state will never be taxed in the state they're living in because of a servicemember's military orders, Shumake said. In fact, he explained, the act states only that income earned from work performed in the nondomiciliary state is not taxable. That doesn't mean the spouse wouldn't have to pay income tax on such income to the state of legal residency.

"Of course, there are those states that don't have any income tax at all," Shumake said. "If the spouse were a legal resident of those states, then they would likely not pay income tax from [work] performed in any state."

Understanding the meaning of "domicile" and knowing how to prove it are keys to understanding the law, Shumake said.

First, he said, the terms "domicile," and "legal residence," are synonymous. A person can have only one domicile at a time. It is one's primary home or permanent residence, and it's formed by being physically present in a state and simultaneously forming the intent to remain there for the indefinite future.

"You have to prove your intent by establishing certain contacts with the state, such as voting there, buying property there, getting your professional license there, claiming in-state tuition rates there, registering a vehicle or obtaining a driver's license there," Shumake said. "Of all of those, voting may turn out to be the most important for proving your domicile for the purposes of the [Military Spouses Residency Relief Act]."

The act also has an effect on personal property taxes, Shumake said.

"The [act] now says that a nondomiciliary state cannot tax personal property such as automobiles and boats if that property is in the state only because the spouse is with the servicemember in that state in compliance with military orders," he said.

For all the positive benefits the law offers military spouses, it can be confusing, Shumake acknowledged.

The Military Spouses Residency Relief Act addresses only tax law concerning income earned in nondomiciliary states, the colonel said, and doesn't change the rules for establishing and proving legal residency.

"One common misperception is that the new law allows a spouse simply to 'choose' his or her spouse's domicile. This is not true," he said. "Domicile must still be demonstrated or proven under the rules that have always been in place. Likewise, a spouse does not 'inherit' the domicile of the military member through marriage."

Spouses also should be aware that the law doesn't allow them to recapture or regain a previously abandoned domicile, he added.

"For example, if the spouse established a Texas domiciliary status and then moved to Virginia under orders with the [servicemember], and while in Virginia the spouse registered to vote and bought property in Virginia and got a real estate license from Virginia, then it looks like the spouse has established Virginia as the new domicile," Shumake said. "The [law] is not likely to allow the spouse to abandon Virginia and resume or recapture Texas domiciliary status while still in Virginia."

It seems the matter of how the law affects driver's licenses has left some in a bit of a quandary, as well.

Whether a spouse needs to obtain a new driver's license in each new state the spouse lives in is a matter of state law and completely unaffected by the Military Spouses Residency Relief Act, Shumake said.

While the new law can be confusing, help is only as far away as the nearest legal assistance attorney, Shumake said. He also suggested checking with appropriate state tax authorities for any rules they may have put out, especially with respect to refunds for tax year 2009.