Understanding the Military Spouse Residency Relief Act

Daniel G. Mazzola, CPA, CFA
Published Date:
May 1, 2015

The Service Members Civil Relief Act (SCRA) was established to protect military personnel from being sued while in the service of the United States and for up to one year following active duty. It postpones or suspends certain civil obligations in order to enable service members to devote full attention to duty and to relieve the stress of their family members.

Under the U.S. tax code, an individual who moves from location to location would normally be responsible for filing multiple part-year and nonresident income tax returns; however, the SCRA stipulates that service members will neither gain nor lose state residency status based upon their presence (or lack thereof) due to military orders.   Thus, service members are permitted to maintain one tax domicile throughout their military career, even if they live in numerous states. 

In 2009, the Military Spouse Residency Relief Act (MSRRA) was enacted in order to grant the same privileges to spouses who accompany service members on their travels.  Key components of the MSRRA exemption are that the spouse is in the state solely to live with a service member who is present in the state in compliance with military orders, and, for some states, that both spouses claim the same state as their legal residence.

Tax Implications of the MSRRA

The MSRRA helps prevent a form of double taxation that would occur when a service member’s spouse works and would otherwise be liable for taxes in a state other than the one in which a residence is maintained. For example, a wife might move from California to Delaware to live near an Air Force base that is her husband’s duty station.  Assuming she is able to retain her California residency, any salary she earns in Delaware would be exempt from Delaware income tax liability. She would still be responsible for tax on such wage income in California.

In addition, MSRRA would not relieve her from paying state income taxes on income that is not related to employment. Income from an interest in real and tangible personal property in Delaware would likely be taxable in Delaware. A spouse’s income from self-employment would qualify for the exemption, provided the spouse’s business did not have a staff or utilize significant capital. If the spouse’s business had other employees, and the predominant source of income was not from the spouse’s own performance of services, then the income would be subject to state income taxation. Interestingly, the nonmilitary employment wages of a service member are taxed in the state where they are earned, so the MSRRA is effectively providing a benefit to spouses above and beyond what is available to military personnel themselves.

The MSRRA provides military spouses with flexibility: they can choose to keep a previous domicile or become a legal resident of a new state. An individual can have only one legal residence at a time, however; this legal residence or domicile is one’s primary home and is affirmed by the individual being physically present there, evincing the intent to remain there indefinitely and return when temporarily absent. A person can prove intent by establishing contacts in the state, such as voting, buying property, obtaining a professional license, registering an automobile, and securing a driver’s license. Exact domicile laws are established at the state level, and these laws vary depending upon which circumstances validate legal residency.

Though accommodating, the MSRRA does not allow a spouse to regain a previously abandoned legal residence or inherit a military member’s domicile. Return again to the example of the Air Force couple stationed in Delaware. If it appears as though the wife intends to stay in Delaware, because she has purchased property or obtained a real estate license, the MSRRA will likely not allow her to retain her status as a legal resident of California. Another scenario would be if a service member from Texas moved to Virginia and, while there, married a Virginia resident. Although the service member can retain Texas residency, the spouse cannot claim Texas as domicile by virtue of the marriage.        

Claiming the Exemption

Rather than file a nonresident return with another state to obtain a refund for taxes paid, or claim a credit with their own state for monies already remitted, spouses seeking an exemption based on the MSRRA would submit the state equivalent of a Form W-4 to their employer’s payroll department. The employer may, in turn, ask to see the spouse’s military identification card, service member’s W-2, voter registration cards, or Department of Defense Form 2058 in order to verify the exemption.

Common occurrences that would cause a spouse to forfeit MSRRA eligibility include divorce, the military person’s termination from service, or the military person being transferred to a locale where the spouse is permitted to follow but chooses not to. The spouse would not lose eligibility in cases where the service member is transferred to a place where the spouse is not allowed, such as a war zone.

Additional Considerations

The MSRRA supports spouses in several ways that are unrelated to tax concerns. Spouses’ choice of residence can enable them to procure previously inaccessible in-state tuition benefits; access community property where it was previously excluded; and receive long-term child support, as some states extend support past age 18.   

The MSRRA is a complicated law because each state has different rules and requirements. Service personnel and their spouses are encouraged to use resources such as the U.S. Armed Forces Legal Assistance website to obtain free and confidential advice.

It would be impractical to allow service members to stay at one duty station for an entire career, and therefore they must move frequently. Service members simply go where they are ordered to go, with spouses quickly accompanying them. Moving regularly can be a complex administrative process. The MSRRA grants a reprieve from the practical and financial burdens of having to change a state of domicile every time the military decides to transplant a family. It gives spouses the same legal protections as service members, because they are no less immune to the hardships associated with these frequent relocations.

Daniel G. Mazzola, CPA, CFADaniel G. Mazzola, CPA, CFA, is an investment advisory representative with American Portfolios Advisors Inc. He is a Chartered Financial Analyst, Certified Public Accountant and Certified Financial Planner. Mr. Mazzola is a member of the NYSSCPA Personal Financial Planning Committee. His website is http://www.danmazzola.com. 

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