What Is the Military Residency Relief Act?
Understand the federal law that allows military servicemembers and their spouses to maintain a single state of legal residence for income tax purposes.
The Military Spouses Residency Relief Act (MSRRA) is a federal law amending the Servicemembers Civil Relief Act (SCRA). It addresses state tax issues for military families relocating due to official orders. Before the MSRRA, a servicemember could maintain their legal residence in one state for tax purposes, but their spouse was often required to become a resident of the new state. This frequently created complicated tax situations that required families to file multiple state tax returns.
The MSRRA prevents the new state from taxing a spouse’s income simply because they live and work there to be with the servicemember. An update from the Veterans Auto and Education Improvement Act of 2022 gives military spouses flexibility in choosing their state of legal residence for tax purposes. For any year of the marriage, they can elect to use the servicemember’s state of legal residence, their own state of legal residence, or the state where the servicemember is permanently stationed.
Core Tax Protections
State taxation distinguishes between “residence” (where you currently live) and “domicile” (your legal home). The SCRA allows military members to retain their state of domicile for tax purposes, so their military pay is only taxed by their home state, not the state where they are temporarily stationed. The MSRRA extends a similar protection to the servicemember’s spouse for their income.
Under the MSRRA, a spouse’s income from wages and salaries is sourced to their chosen state of legal residence, not the state where they live due to military orders. For example, if a military couple has a legal domicile in Texas (a no-income-tax state) and is stationed in Virginia, the spouse who works in Virginia does not have to pay Virginia state income tax on their wages. Their income is only subject to the tax laws of their chosen legal residence.
This protection applies to income from services performed, such as wages, salaries, and tips. Income from other sources, like rent collected from a property owned in the new state, is not protected by the MSRRA and is subject to the tax laws of the state where the property is located. The law also prevents the new state from using the servicemember’s military income to calculate a higher tax rate on any of the spouse’s income that is taxable in that state.
Eligibility Requirements for Spouses and Servicemembers
To benefit from the MSRRA, both the servicemember and their spouse must meet specific criteria. The servicemember must be a member of the uniformed services, which includes the Army, Navy, Air Force, Marine Corps, Coast Guard, and commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration on active duty. Their presence in a state must be solely due to compliance with military orders.
The spouse must be legally married to the servicemember and be present in the new state to be with them. Following a 2022 legislative update, the spouse can choose their state of legal residence for tax purposes for any year of the marriage.
The spouse may elect to use the servicemember’s state of legal residence, their own state of legal residence, or the state where the servicemember is permanently stationed.
Establishing and Maintaining Domicile
A state of domicile is more than just an address; it is the place you consider your permanent home, and states require clear evidence of this intent. To claim a state as your domicile, you must demonstrate that you treat it as your legal residence by establishing a physical presence and other connections there.
Actions and documents that help prove your domicile include:
- Registering to vote and voting by absentee ballot
- Holding a driver’s license or state-issued ID from the state
- Registering your vehicles in the state
- Maintaining bank accounts in the state
- Listing the state as your residence on legal documents
- Paying any applicable state income taxes to that state
- Owning property or declaring a homestead exemption in the state
If your domicile is a state with an income tax, you are required to file and pay taxes to that state on your worldwide income, even while living elsewhere.
How to Claim the Tax Exemption
The primary action to claim the tax exemption is to stop state tax withholding from the spouse’s paycheck in the new state of residence. This is accomplished by providing the spouse’s employer with the correct state-specific withholding exemption certificate. Each state has its own forms and procedures for this, so it is important to obtain the appropriate document for the state where the spouse is working.
While the Department of Defense offers Form DD 2058-1, employers require the official state form to cease withholding. Completing this form notifies the employer that the spouse’s wages are not subject to that state’s income tax under the MSRRA.
If state taxes were already withheld from the spouse’s pay during the year, a refund must be claimed. This requires filing a non-resident state income tax return in the state where the spouse worked. On this return, you will report the wages earned but then claim an exemption for that same amount, citing the MSRRA, which results in a refund.