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Military Taxation in CA Part II – Nonresidents
Filed under: California, Military | Tags: California, domicile, military, Military Spouses Residency Relief Act", MSRRA, nonmilitary, nonresident, PCS, Permanent Change of Station, residency, Servicemember Civil Relief Act
Leave a comment Military Taxation in CA Part II – Nonresidents
Originally published in the Cedar Street Times
February 22, 2013
Two weeks ago I laid the groundwork for important definitions related to taxing military servicemembers. I also discussed how servicemembers are taxed just like California residents if their domicile is California, and they are stationed in California. If a member whose domicile is California has a permanent change of station (PCS) outside of California, they are considered nonresidents. Under California law, nonresidents are not taxed on their military income or intangible income such as interest and dividends. They would also not be subject to taxation on military income in the other state either due to the federal Servicemembers Civil Relief Act which prohibits another state from taxing a servicemember’s military income while domiciled in another state.
Due to the Military Spouses Residency Relief Act of 2009 (MSRRA), spouses that go with the military servicemembers now receive similar treatment and their earnings from personal services and intangible income such as interest and dividends are exempt from tax. In the past they had to file as residents whenever they met the requirements of wherever they were physically living. This act applies to all military servicemembers’ spouses regardless of domicile or station as long as both spouses have the same domicile. This is a very important distinction. And you cannot simply adopt your military spouse’s domicile.
If the military spouse was domiciled in Texas, for instance, and then gets married in another state, the new spouse cannot claim Texas unless he or she actually lives in Texas and takes proper steps to make it his or her domicile. They could both claim the same domicile in the state they are living at the time, but that may be undesirable if that state has unfriendly military tax laws. Regardless, until both spouses are able to claim the same domicile, the coveted provisions of MSRRA generally do not apply.
Another interesting twist to watch out for is if a California domiciled servicemember gets PCS orders to another state and the spouse stays in California. In this case, all of the spouse’s income is now taxable to California as well as half of the military servicemember’s military pay and interest/dividends, etc. as community property of the spouse!
All the same rules apply to servicemembers whose domicile is in another state but are stationed in California, except they would look to their own state of domicile to see how that state may tax or exempt its servicemembers for its own state tax purposes. California, however, would not be able to tax the servicemember or the spouse (assuming they have the same domicile). The most common places I see for military domicile are Texas and Florida: neither has a state income tax. This way, whether they are stationed in their own state of domicile or elsewhere, they have no threat of paying state income taxes.
It is also important to know that the military servicemember’s nonmilitary income would still generally be subject to taxation wherever it is being earned,and so would items like rental property income. Many military people own homes in multiple states. They should be aware they may have to file a tax return in those states. Depending on the state, some people may need to file state returns even if the property produces losses every year which create carryovers to be utilized when the property is sold.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Military Taxation in CA Part I – Domicile, Residency, and CA Residents
Filed under: California, Military | Tags: California, domicile, home of record, military, nonresident, PCS, Permanent Change of Station, residence, residency, resident, service members, servicemember, servicemembers, SLR, state of legal residence, taxation, temporary or transitory
Leave a comment Originally published in the Cedar Street Times
February 8, 2013
Here in this little part of California that some call heaven, we have a number of military related institutions drawing servicemembers from around the world. The next few articles will focus on military taxation in California.
The first thing we need to do is define a few important terms.
Home of record is a term that indicates the place you were living when you entered the military, and cannot be changed. This generally does not affect taxation, but can affect benefits.
Your residence is the place you are physically living.
State of legal residence for military purposes is typically synonymous with domicile to be discussed next. Do not confuse this with legal residence which you see on many non-military legal forms indicating a desire to know your residence address as opposed to your mailing address!
Domicile is the place that you consider your permanent home; if you are living away from your home, it is the place you would return to after being absent for temporary or transitory purposes (or away on military orders). It is usually the place you are registered to vote, have your bank accounts, have your driver’s license, register your vehicles, perhaps still own a home and store personal items, etc. You have the option of changing your domicile by making convincing changes to items such as the above, but you generally have to be present in the state at the time, show that you have abandoned your prior domicile, and notify the military of this change.
Residency more closely determines how you are to be taxed, but is affected by domicile. For a civilian, residency is a term given if someone is in California for other than a temporary or transitory purpose (generally nine months or more), or conversely someone whose domicile is in California but out of the state for temporary or transitory purposes.
For a military servicemember, residency is even more closely tied to domicile. A military servicemember whose domicile is California is considered a resident if stationed in California, and a non-resident if stationed elsewhere due to Permanent Change of Station (PCS) orders (not temporary orders regardless of duration). A military servicemember whose domicile is outside of California but that is stationed in California is considered a non-resident unless he or she works to change his or her domicile to California. Most people are trying to get out of California taxation, so I rarely see military people changing their domicile to California!
Now let’s start to talk about what this means for tax purposes, including how it affects spouses. Based on the above definitions we will start with those that are considered California residents (again, those that are domiciled and stationed in California). It is pretty straight-forward: these individuals are taxed on all their income including their military income. The spouse will generally also be considered a resident and will be taxed the same, unless the spouse is also a military servicemember, and has a different domicile. That spouse would then be a nonresident and taxed differently.
In my next column in two weeks, we will begin talking about nonresident military personnel, which accounts for the majority of servicemembers living in this area.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 