Military Spouses Residency Relief Act Details and Matrix

I have a LOT more good information for you in The Short Cheap Tax Book for the Military.

I want to simplify the MSRRA for most active duty personnel.  States have taken this incredibly simple Act, and made it sound about as complicated as it can be.  I expect they are also going to fight to twist its words to try to maximize their tax revenues.

I've already seen some states use the Act in an attempt to say that a spouse has an OBLIGATION to retain their original state of residence, which couldn't be further from the truth.  The plain language states that the spouse of an active duty military service member neither gains nor loses their state of residency as a result of leaving that state to be with their spouse (my words - not exact from the statute).  States have become fairly uniform in their interpretation, and I will sum it up here:

The spouse of a military member has two choices for state of residency: the state they are physically residing in, or the active military service member's state.  In order to claim the service members state, they have to have previously established residency in that state, usually by living there and doing the usual resident things (driver's license, job, home, registering to vote, etc.)  It should be easy to determine if you qualify for this choice, with one little exception...2018 Change - the requirement to have established residency in the claimed state was eliminated. A spouse can now claim a state if they meet the other requirements even if they have NEVER lived in that state.

Applying common sense, this decision should normally be made at the time the spouse first marries the service member, or when one half of the already married couple joins the military.  In this case, it's simple and easy.  The fact that the military couple buys a home, has kids, lives for an extended period of time in the new state should have no impact on this election (assuming the spouse doesn't register to vote or take other positive action to indicate they want to become a resident of the state they're stationed in.)  Where this becomes interesting is when a couple stays in the military for many years, over many duty stations.  Most states will have issues if you (the spouse) change your state of residency back and forth based on the relative tax advantages of the various states you move between over the course of a career.  They would assume that once you make your election, that's it.  I could make arguments either way, but, be aware that if you keep changing states, you might have to fight over it.

The best plan is, once you've made the election, do as many things as possible to cement your election to the new (or old) state of residence.  Always register to vote in the state you want as your residence.  If possible, have a driver's license from that state.  Try to register cars there.  I'm sure you can think of other things.  The idea is to maintain the things that show an interest in returning there after military service is over.

I have discussed repeatedly how important it is to understand exactly where each state stands with regard to taxation before making your decision, since the state you decide to be a resident of will expect you to file a tax return and pay taxes, even though you work in the state you are stationed in.  Just because Ohio doesn't tax the active military member's income doesn't mean the spouse gets off scott free.

For that reason, I have made an excel spreadsheet matrix of all possible state combinations with my opinion as to which state you should choose.  The matrix is based ONLY on taxes, so there may be other reasons you might choose to not follow the recommendation.

To use the matrix, look up the military members state of residency in the left hand column, and then follow across until you find the state you are stationed in.  That box will have my recommended state.  An "X" means there is no significant advantage to either state.  The states in the left hand column that are bold are states that have a system whereby a resident can be treated as a non-resident for tax purposes, usually by maintaining a home out of state and spending less than thirty days in the state.  For the active duty member this easily avoids taxes from that state.  For the spouse, it is my (and many other's) interpretation that this applies to the spouse as well.  Be aware that the state may have different ideas, and the MSRRA hasn't been around long enough to be sure who's right.

As an idea about my methodology, I obviously prioritized states with no income tax, then states with no income tax but some other tax (NH and TN), then states with generous tax provisions for spouses or the above discussed non-residency issues.  Alaska always wins because not only does it have no state income tax, but it also cuts a check every year for its residents (though you may have to meet other requirements to get it.)

Again, this is a table based on TAXES and nothing else.  I would highly recommend looking into the specifics of your decision and desires, especially your long term plans post military.  Also, as the active duty member planning on a long career, if you get stationed in a tax free state, and you like it enough to consider it as your post career destination, change your residency to that state while living there.  If you are or get married there, both you and your spouse won't pay state taxes for your entire career.

Here's a link to the matrix.  Once there, click the big blue button, and the excel spreadsheet will open or download, depending on your computer:

MSRRA Matrix Link

If you choose the state you are not stationed in, each state will have its own rules for avoiding tax withholding on your job.  Look these up and follow them (your employer will probably be no help with this).  Be aware that they will not withhold for the state you want to be a resident of, so, if that state has an income tax, you will probably owe them money each year.  Either save the money, or make estimated payments.

My tax book has over sixty life situations with the tax consequences explained.  Each chapter has military details included.  It's the most useful tax book out there, and is relatively inexpensive.  Please check it out:

Everyday Taxes 2017

For details on the new tax law, see The Short Cheap Tax Book for the Trump/GOP Tax Law