Some military spouses could receive potentially thousands of dollars in state tax refunds for tax year 2018, thanks to a new law that took effect Dec. 31 — and lessen or eliminate their tax bill in the future.

The Veterans Benefits and Transition Act of 2018 allows military spouses to choose the legal residence of their service member for state and local tax purposes, as well as for registering to vote — regardless of whether the spouse has ever lived in that state.

The law applies for taxes retroactively to tax year 2018, according to Army Lt. Col. David Dulaney, executive director of the Armed Forces Tax Council. So spouses who choose to claim their service member’s state now could potentially get refunds from the state where they paid taxes. If their newly claimed state has no income tax, or if it’s a lower tax rate, then the spouse comes out ahead.

Under the long-standing Servicemembers Civil Relief Act (SCRA), troops can maintain their legal residence as they are required to move around with the military, which allows them to vote and pay taxes in their state of legal residence, without having to pay taxes in two states.

A significant number of troops claim their legal residence in states that have no state income taxes – such as Florida and Texas. Under the new law, military spouses can claim these states based solely on their service member’s state of legal residence. So the spouse will pay no state income taxes, either.

According to the Federation of Tax Administrators, states with no income tax are:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Or, in some cases, the service member’s domicile state has a lower tax rate. So the spouse could pay less in taxes. It’s a choice that spouses will make, but they didn’t have the choice before.

“This is quite the expansion of rights for military spouses,” said Dulaney. Under the previous law, changed by the Military Spouse Residency Relief Act in 2009, a spouse could vote in and pay taxes to the same legal state of residence as the service member, but had to establish legal residence by actually living in that state.

Under the new law, the spouse doesn’t have to establish physical presence in the state, or have an intent to remain in the state permanently. “They can just elect to choose the legal residence of the service member for purposes of taxes and voting,” he said. The only requirement is marriage to that service member.

“That’s a great benefit for the military spouse,” Dulaney said. It applies not only to state income tax but local taxes such as vehicle use tax. The law takes effect for voting registration after March 31.

Dulaney gives an example: A Florida-domiciled soldier marries a North Carolina resident while stationed at Fort Bragg, and they’ve moved to Virginia on Permanent Change of Station orders. Under the new law, she can claim her husband’s legal residence of Florida, which has no state income tax, and she could get a refund of the Virginia state income taxes she paid in 2018.

In Dulaney’s own situation, when he married his wife, he was a Texas resident and so was she. When they moved to Fort Benning, Georgia, she had to pay Georgia state income taxes on her wages, as she couldn’t remain a Texas resident. They moved to Virginia, and she paid Virginia income tax — all while he was able to maintain his Texas legal residence under the SCRA.

Get expert advice before you take the step

It’s been less than a month since the law was enacted, so states are still setting up procedures, which will vary from state to state. The Armed Forces Tax Council is in the process of contacting all 54 state tax authorities to make sure they’re aware of the law, Dulaney said.

In the meantime, generally, a spouse who has decided to choose his or her service member’s state of residence would file state tax returns in that state. Returns would also be filed in the state where he or she paid taxes in 2018, if different. That’s where a refund, if any, would come.

And going forward, spouses should notify their employer about their change in state of legal residence.

The Internal Revenue Service will start accepting tax returns on Jan. 28, and states generally start accepting returns around the same time, Dulaney said.

But there are cautions for military couples, Dulaney said, and he strongly advises them to come in to their legal assistance offices for help in making the decision, and preparing their returns.

“We have advised our legal assistance offices throughout DoD that they should do outreach and education to their military members and military families, and advise them to come in to their legal assistance office to help them understand how they go about doing this election, and also what the consequences might be… .

“I can’t presume what the state tax authorities will do, but this is all under the presumption that the service member has a bona fide legal residence in a state other than the one they’re assigned to. A lot of our military members, as they move around, give mixed signals. They may get a driver’s license in one state, register to vote in another, maybe file taxes in one state," Dulaney said.

“If the state tax authorities see that they’re no longer able to tax military spouse income that’s produced in their state because of this [choice], they may start looking hard into whether or not the service member is able to claim legal residence in another state, and whether or not the service member is a legal resident of the state they’re actually assigned in,” Dulaney said.

The Armed Forces Tax Council oversees the Volunteer Income Tax Assistance (VITA) program, which offers free tax preparation services at tax centers on military installations. DoD works with the Internal Revenue Service, and VITA preparers receive extensive training through DoD and the IRS. The training includes situations like these that are unique to the military community.