Military Taxation in CA Part II – Nonresidents

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.

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