top of page
  • Writer's pictureBetsy at RVPF

Evaluating Residency Options as an Active Duty Service Member

Updated: Oct 5, 2021

Most Americans give very little thought to their state of legal residency as they live, or are domiciled, in one location for an extended period of time. While complications exist for snowbirds, college students, and temporary workers, military members and their spouses face a myriad of rules to navigate when determining their state of legal residency.

Home of record, legal residency and domicile, oh my! It’s important to recognize that the home of record has little bearing on legal residency. Home of record is the location where a service member first joined the military. It’s like a birthplace and generally cannot be changed except for clerical error. Home of record has very little importance, although it is significant when separating from service with less than eight years of service as it is used to determine final PCS entitlements. A member’s home of record may not actually reflect their state of residency depending on applicable state law.

The definition of domicile varies from state to state but it generally determines what state laws will apply to an individual or family, including taxation and other types of financial law. It may seem like the answer to determining domicile would be as easy as “where does someone live most of the time?” but it’s not so simple. Despite the variance from state to state, it typically involves where an individual has a fixed and permanent home where they actually reside AND where they intend to remain or return. I’ve heard of military members claiming Texas as their state of domicile simply by attending basic training there, but I think they would be hard pressed to support that claim given the short-term nature of basic training.

Although most states agree on the definition of domicile, there isn’t common agreement on the factors that determine domicile. Therefore, if a military member is seeking to change or maintain their state of residency it’s best to research state law to ensure that they are doing all they can to validate intent. Some factors that reflect intent include the following.

- Registering to vote

- Actually voting

- Getting a driver’s license

- Registering a vehicle

- Filing (and possibly paying) income taxes

- Updating estate planning documents

- Establishing a permanent address

- Notifying old state of residency of change

- Claiming a property tax exemption

- Obtaining a hunting or fishing license

A servicemember who desires to change their state of legal residency, according to an Army JAG information paper, requires ALL three requirements: 1) physical presence in the new state, 2) simultaneous intent to remain in the new state or treat as your permanent home, and 3) abandonment of old state of legal residency.

Service Member’s Civil Relief Act (SCRA) and Veterans Benefit and Transition Act (VBTA): The first of these two acts hold a range of provisions, but one of them is that service members may retain a state of residency that is different from where they are stationed. VBTA came about later and allowed spouses greater flexibility in determining their residency.

For example, before passage of this act a service member whose residency was in Mississippi but married a local Oklahoman while stationed there would have two choices. They could have either filed two separate state income tax returns based on their differing residency status or the service member could establish domicile and residency in Oklahoma allowing them to file a joint return. Following passage of the VBTA, the non-military spouse can now adopt the military member’s state of residency. This significantly simplified the tax filing process for couples of differing states of residency. To be completely honest though, I’ve seen many spouses who (incorrectly) changed their residency to match the military members even before VBTA, so the law was in some ways just catching up with practice.

A few strategies that are never allowed:

1) Simply changing state of residency for income tax purposes through DFAS/MyPay when there is no basis of physical presence. Anyone who has been around the military very long has heard someone say that they changed their state for income taxes to Nevada, Washington or the like and nothing bad happened. This type of passive encouragement to avoid income taxation is definitely not an advisable move.

2) Cherry-picking a new state for income tax withholding and then not filing a state income tax return anywhere. Military members who figure that they PCS every couple of years and don’t file a state tax return anywhere are running afoul of both the intent and the spirit of federal and state laws meant to assist service members.

3) Retiring or separating from the military and failing to follow state law as a civilian veteran. For example, continuing to register a vehicle in Kentucky because of their lower vehicle registration rates despite having established a permanent home Oregon, which could result in significant fines.

It’s Complicated! This can all get very messy!

Example 1: Sarah, originally from Nebraska, is a medical student at the University of Iowa. Iowa state law is that a person who is primarily in the state for educational purposes is a nonresident. When she joins the military, her home of record may be Iowa, her driver license and voting record may be in Iowa and she may even own property in Iowa, but her residency remains with Nebraska. Her first PCS takes her to Illinois for medical residency where she has the choice to either establish Illinois residency or maintain Nebraska. Illinois doesn’t tax military earnings, but Nebraska does regardless of where the member is stationed. Should she establish legal residency in Illinois to avoid income taxes? She fulfills the requirement of physical presence, but where does she intend to make to permanent home? It’s pretty hard to determine intent and plenty of people have fibbed (gasp!), but returning to Nebraska after her military commitment could cause a problem. What if she intends to return to Iowa (or anywhere other than Nebraska) after her military service? Then she may establish residency and subsequently enjoy state tax-free military income. Despite Illinois not typically being considered tax-friendly, it’s actually a good option for active duty military.

Example 2: Jon is a pilot originally from North Carolina. He claims North Carolina for income taxes and pays a flat rate of 5.25%. His driver’s license is from North Carolina, his car is registered in Texas where he completed pilot training, he owns property in California where he is currently stationed, and he’s still registered to vote in Florida from when he was an undergraduate. He has no estate planning documents because he hasn’t gotten around to visiting the legal assistance office (surprise, surprise). What’s his state of residency and what state may lay claim on his income for taxation? Where would his estate be settled if he passed away?

I’ll actually leave that answer to the attorneys, but I do know it’s a mess. Jon would be well served by making an intentional effort to determine if he wants to maintain North Carolina (his original domicile) or transition to California. Switching to Texas or Florida are not wise due to his lack of physical presence. Which makes more sense from an income tax perspective? If Jon isn’t sure where he wants to live when he fulfills his military commitment, then he has a choice between the two states. California has a progressive tax system which may mean that Jon would pay less than the 5.25% flat tax due to North Carolina.

Using the free website SmartAsset to calculate a tax estimate for Jon, who is a married O3 with two kids and annual taxable military wages of $86,820, we find that California is actually a more tax efficient option. Additionally, if Jon is later stationed outside of California then his income would not be subject to CA income tax as a military member. North Carolina will continue to collect income taxes regardless of where he is stationed.

Example 3: Quinn is a seventeen-year military veteran who has been claiming Nevada as her state of legal residency and has enjoyed no state income taxes for nearly two decades. She is now stationed in Massachusetts where her spouse Hunter, is employed and also claims Nevada. Quinn and Hunter own a home in Massachusetts, registered their new vehicles there and intend to stay when Quinn retires in three years. They have even gone so far as to post on their social media sites that they are “happy to have found their forever home.” Nevada has no state income tax and Massachusetts taxes military income regardless of where it is earned. Given that they have both physical presence and intent to remain, should Quinn and Hunter switch their residency to Massachusetts? Well, what would you do?

Instead of just hoping that it will all work out and that the Massachusetts Department of Revenue won’t know or mind, it’s best to seek legal counsel. If the attorney determines that there is sufficient evidence to continue claiming Nevada as their state of legal residency, then they get a few more years to enjoy the extra income! However, if the attorney who is presumably familiar with Massachusetts law recommends switching states of residency then Quinn and Hunter may avoid a painful future tax penalty and/or legal battle.

There isn’t a single clear way to determine residency for a military member and their spouse. However, there are plenty of better or worse actions to demonstrate intent for a desired outcome that may result in lower income or property taxes, better creditor protections, or other military related benefits.

I offer two recommendations for military members as they navigate questions of residency. First, avoid using social media as the primary source for information and always use legal assistance services instead. Some of the recommendations I have seen float around social media are nothing short of terrifying and could have costly consequences down the road. Second, evaluate the residency decision as a customary part of each PCS.

38 views0 comments

Recent Posts

See All

10 Financial Mistakes Physicians Should Avoid

No one said that one of the hardest parts of being a physician would be managing the money. But like most things in life, it’s rarely that simple. Read up now on ten common financial mistakes made by

bottom of page