Military Spouse Residency Relief Act Taxes

We get a lot of questions about military spouses and income tax given our proximity to Camp Lejeune in Jacksonville.  For Military spouses, their income may be non-taxable in the state where they  are currently living.

A military spouse is exempt from paying income tax when he or she:

a. Lives in a state that is different from his or her permanent residence;

b. Lives in a state solely in order to live with the service member; and

c. the service member is living in the state in order to satisfy military orders.

There are some other things that must be kept in mind. While the spouse is exempt from paying state tax in the place they are currently living in, they must still pay and file state taxes in the state that they consider home. 

Let's illustrate: Mary is in NC with her husband John, who is in the Marines. They lived in IL when John enrolled in the Marines. Mary works at the local florist.  Mary wished to use IL as her home state of record and forgot to tell her employer that.  Throughout the year, NC tax was withheld from her pay check. What happens? Mary will receive a refund at year end from NC. She will still need to file a tax return for IL and will also owe state taxes there.

What if Mary's "home" was a state (such as FL) where there was no income tax? Mary would get the NC refund and not owe state tax .

Should Mary have IL tax withheld instead of NC and avoid this whole thing? If she knows that she wants to claim IL as her state for tax purposes.  She could always claim NC as her tax state if she wishes. She would need to notify the payroll company so they adjust her paycheck for the correct state withholdings.

When in doubt, check with your local department of revenue and/or seek professional tax assistance.