Tax Breaks

State Tax Breaks for Military Families

You can simplify the process and keep some cash in your savings account by following a few key provisions.

Federal tax law has some sweet (and well-deserved) breaks for military families. And, here are key provisions that can simplify things—and maybe save money—when it comes to state income taxes, too. Generally, your legal residence for determining where you vote, get your driver's license and pay your taxes is the state where you live. But the law allows servicemembers to maintain legal residence in one state even if they are stationed in another. Imagine the hassle if you had to change all those things every time you were transferred. That's the simplicity part.

SEE OUR COMPLETE GUIDE: Personal Finance Tips for Military Families

The savings part is that if your legal residence (also called domicile) is—or is changed to—a state that has no income tax, you can be shielded from the state levy even if you find yourself living in a high-tax state.

A Pilot's Story

Lt. Eric Schwab, a 28-year-old Navy pilot, is now stationed in Kingsville, Tex., after a two-year deployment with the USS Enterprise. A native of Rhode Island, that’s where Schwab has filed state income taxes since he was commissioned in 2005, despite a training stint in Florida and several years being stationed in Virginia. "Since taxes in Virginia were higher than in Rhode Island, I didn't want to change my domicile while I was there," says Schwab. When in Florida, Schwab wasn't aware that he could change his legal residence to that no-tax state.

But now that he's in Texas (also a no-income-tax state), the lieutenant will claim the Lone Star State as his domicile. So, even if he's transferred to a state that imposes an income tax, his military pay will be tax-free at the state level.

How to Do It

You can't just wish away state taxes by claiming a no-tax state as your home. "Domicile is a term of art meaning physical presence plus the intent to remain there permanently or to return there," explains Lt. Col. Evan Stone, director of the Armed Forces Tax Council.

Your domicile begins as your home state when you join the military and can remain the same, regardless of where you are actually deployed. Or, if you are transferred to another state—so you meet the physical presence test that Stone cited—and decide to make it your home, you can establish it as your legal residence. You can’t do this just for tax purposes. You'll want to register to vote in the state, register your car and get your driver's license there, and plan to return once your service is completed.

Although your military pay will be taxed (or not) by your domicile state, other earned income (from a second job, for example) can be taxed by the state where you are stationed. Check the rules carefully wherever you are stationed.

A Break for Spouses

In recent years, the law has been expanded to provide state-tax relief for husbands and wives. Now, a spouse who has the same domicile as a servicemember can also maintain that legal residency if the couple moves to a new state under military orders. His or her civilian pay will be taxed by the rules of the domicile, not the state where they actually live.

That rule will be a big help to Lt. Schwab, who will soon be married to Megan Gorzynski. Once they establish Texas as their legal residence, they'll both enjoy the benefits of a no-income-tax state no matter where he is stationed throughout his service.

If you have questions about establishing your domicile, check with the legal-assistance office on your base, ship or installation.

Most Popular

What Are the Income Tax Brackets for 2022 vs. 2021?
tax brackets

What Are the Income Tax Brackets for 2022 vs. 2021?

Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.
September 20, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
19 Best Stocks to Buy Now for High Upside Potential
stocks

19 Best Stocks to Buy Now for High Upside Potential

Finding the best stocks to buy when the market is selling off can be daunting, but the pros believe these 19 top-rated names are poised for big return…
September 23, 2022

Recommended

Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
September 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
September 23, 2022
Capital Gains Tax 101: Basic Rules Investors and Others Need to Know
capital gains tax

Capital Gains Tax 101: Basic Rules Investors and Others Need to Know

Learn the ins and outs of the capital gains tax, which you may owe if you sell stocks, your home, cryptocurrency, a stamp collection, and much more.
September 22, 2022
Capital Gains Tax on Real Estate
capital gains tax

Capital Gains Tax on Real Estate

Selling your home or a rental property at a gain? Here are important capital gains tax rules to keep in mind.
September 22, 2022