First, there are two terms used by the military to define your state of residence:
- Home of Record (HOR)
Your home of record is the state recorded by the military as your home when you were enlisted, appointed, commissioned, inducted or ordered in a tour of active duty. This is often the state you should continue to use as your tax home as you move from state to state (or overseas) on military orders.
- State of Legal Residency
Your state of legal residency (SLR) is your “Home of Record,” unless you changed it to another state. Changing the state on your paycheck records Does Not Change your SLR.To change the SLR, a DD Form 2058 must be submitted to your local finance officer and accepted. From a tax standpoint, your State of Legal Residency (SLR) is considered your “domicile” or “resident” state as long as you are on active duty. Even if you are stationed in another state, you’re still considered a resident of your SLR.
IMPORTANT: The Military Spouse Residency Relief Act (MSRRA) describes where spouses of military service members can file state income taxes.
Consider the example of Joe, who lived in South Carolina when he joined the military in 2010. This was recorded as his HOR and SLR. With Permanent Change of Station (PCS) orders, he is now stationed in Maryland and lives in Virginia.
Joe files a resident return in which state?
We know that Joe is considered a South Carolina resident (that's his Home of Record and State of Legal Residency). South Carolina says that Joe must continue to file a South Carolina resident income tax return regardless where he is stationed.
Each state decides whether service members must file a return when they are stationed outside their resident state. If Joe’s SLR was in a different state, he might be required to file a return for that state and then deduct all of his active duty income, resulting in little or no state income tax. Some SLR states, like South Carolina, will tax Joe on his income even if he is stationed outside of his Home of Record.
For Example: When California is a Home of Record and the active duty military is stationed outside of California, the service member is considered a nonresident of California.
Does Virginia or Maryland expect a tax return from Joe?
The Service member Civil Relief Act states that an active duty member is not considered a resident of a state unless it is his SLR.
Joe would only file a Virginia or a Maryland return if he had a civilian (nonmilitary) job in that state. If he’s working at Home Depot in Virginia on the weekends, he would file as a Virginia nonresident and only report income from that W-2. He would not report any other type of income on his Virginia return. He would still file a South Carolina resident return, where he may get a credit for the tax he paid on his wages to Virginia.
If Joe is married and his wife works in a civilian job in Virginia she might have to file a state tax return in Virginia. However, if she qualifies under MSRRA, she might also be able to claim South Carolina as her state of legal residence along with her husband. Then she might also be exempt from filing a Virginia state return, but be sure to check with the state you are currently in for their laws.