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Date: February 9, 2010
Subject: New Law on Military Spouse Residency ...

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New Law on Military Spouse Residency for Tax and Voting Purposes

Imhotep (Wisdom To You) G&G Readers,

On 11 Nov 09, Public Law 111-97, the “Military Spouses Residency Relief Act” (MSRRA), sponsored by Senator Richard Burr (NC) became law. In pertinent part, the law amends the Servicemembers Civil Relief Act (SCRA) to: (a) permit military spouses to keep their state of legal residence (a/k/a “domicile”) for tax and voting purposes when accompanying their military member/spouse on orders; (b) permit military spouses to regain a “lost/prior” legal residence for tax and voting purposes; and (c) protect a military spouse’s income from taxation except by the spouse’s state of legal residence.

This provision complements existing SCRA law, and affords spouses the same tax protection and voting rights as currently afforded military members. (The SCRA allows military members to retain their legal residence notwithstanding transfer by military orders to a new state, and prevents the new state from taxing the military member’s military income.) There are, however, some limfacs and challenges in implementing the law; these are detailed below.

*** Text of Law. As amended by the MSRRA, the tax portion of the SCRA now reads:

“A spouse of a servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the servicemember in compliance with the servicemember’s military orders if the residence or domicile, as the case may be, is the same for the servicemember and the spouse.”

Application and Implementation.

> The MSRRA is retroactively effective for all of CY (tax year) 2009. Because of its promulgation late in CY09, states have scrambled to provide both procedures and forms to conform to this change. It is worth noting that the law’s timing is perhaps sub-optimal, given the tight budgets faced by many states.

> In addition, military tax assistance offices have also scrambled to ensure members are appropriately counseled/guided on the law. In this regard, the Pentagon Army and Air Force Legal Assistance Office just held an AF-wide webcast for all Air Force legal offices in an effort to develop a common operating picture and uniform methodology for tax assistance program offices. (This IOI was delayed to receive/incorporate the benefit of that webcast briefing.)

> It is clear from the text of the statute that the spouse must claim the same legal residence as the military member in order to qualify. Additionally, the spouse must have previously been a legal resident of that state, and “lost” that residence because of a PCS by the member.

> The SCRA applies only to military pay. The MSRRA applies to all income earned by a spouse. Thus, an Airman can be taxed by the state in which the Airman is assigned for e.g., off-duty employment earnings; the spouse cannot be so taxed.

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Examples:

(1) Airman is a Florida resident. While stationed at Nellis AFB, NV, Airman marries Spouse, a Nevada resident. Airman and Spouse then PCS to Langley AFB, VA. In this scenario, Spouse will not be able to retain/regain her Nevada residency for purposes of taxation under the law, because Airman is not also a Nevada resident.

(2) Above Airman and Spouse then PCS to Randolph AFB, TX and establish residency. Airman and Spouse can then maintain Texas residency when they PCS to Offutt AFB, NE. While at Offutt, Airman is employed off-duty at Hardees, Spouse works as a school teacher and their son is a mechanic. The Airman’s military pay and the Spouse’s income are exempt from taxation by Nebraska. However, the Airman and his son must pay NE taxes on the Hardees and mechanic earnings.

> The law does not apply to dependents and is not likely to be so extended in the future given “strong” DoD opposition to the tax (not voting) portion of the bill. It bears noting that DoD formally opposed the tax portion as essentially treading on state authority, upsetting long-standing tax relationships, providing an uneven windfall to certain military members, openly encouraging military members to establish residency in certain states, potentially hindering a spouse’s opportunity to be hired by state and local governments given the knowledge that the spouse’s pay will not be taxable, undermining collateral DOD efforts to obtain cohesive/uniform state action on other initiatives ... such as unemployment compensation for military spouses who are eligible in their current state but do not--as a result of residency requirements--qualify for benefits in the PCS’d-to state, and encouraging cash-strapped states to challenge the assertions of residency by the spouse and the servicemember, in turn.

Changing State of Legal Residence. Members may formally change their state of state of legal residence by completing a DD Form 2058, “State of Legal Residence Certificate,” available at: http://www.dtic.mil/whs/directives/infomgt/forms/eforms/dd2058.pdf.

The form’s instructions set out the criteria that must be considered in determining whether one’s legal residence may properly be changed, to include the core test--“The formula for changing your State of legal residence/domicile is simply stated as follows: physical presence in the new State with the simultaneous intent of making it your permanent home and abandonment of the old State of legal residence/domicile.” Members and spouses should tread carefully in this area, and should consult a legal assistance attorney with any questions.

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Asante Sana (Thanks)
Gary Gray
Tax & Financial Consultant, RFC
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