Discussion:Military Residence

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Discussion Forum Index --> Basic Tax Questions --> Military Residence


Discussion Forum Index --> Tax Questions --> Military Residence

Carbon2 (talk|edits) said:

2 October 2007
I have an active duty, special forces, client who has lived in CA for the past 10 yrs- when not deployed. He has purchased real estate,cars, married, sold real estate etc., all in CA. His mil W2 indicates state of residence is OH.

IMHO this guy is a CA resident. Any thoughts?

Thanks

Riley2 (talk|edits) said:

3 October 2007
Is he stationed in CA?

KatieJ (talk|edits) said:

3 October 2007
No, he is not a CA resident as long as he keeps his military home of record in Ohio.

The Servicemembers' Civil Relief Act of 2003 (50 U.S.C.A. Sec. 574 ff., successor to the Soldiers' and Sailors' Civill Relief Act of 1940) restricts states' jurisdiction to tax the income of military personnel. A person cannot be considered to have changed residence or domicile solely by reason of being stationed elsewhere on permanent military orders. Military compensation earned by a nonresident does not have its source in the state where the member performs the services. And military compensation of a nonresident cannot be used in any way to calculate state income tax liability.

A military member remains domiciled at the place where he or she was domiciled at entry into service, unless the member takes specific action to change domicile. Generally, states use the "home of record" on military records as a convenient proxy for domicile. Military home of record is the place to which the military agrees to pay your way back when you separate from service. One of the definitions of domicile is "the place to which, whenever absent, an individual intends to return." While a military member may establish significant ties in a location where he or she is stationed, and remain there for a substantial period of time, he or she is generally not considered to have changed domicile unless the home of record is changed on military records.

Many states consider their military domiciliaries to remain tax residents, taxable on all of their income, as long as they are on active duty. As it happens, Ohio is one of those states. Your client is an Ohio resident for income tax purposes. However, beginning in 2007, all military compensation of a resident member is exempt from Ohio income tax except to the extent that the services were performed in Ohio.

For more information on the California rules regarding military residence and the taxation of military nonresidents, see FTB Publication 1032 ([1]).

Riley2 (talk|edits) said:

3 October 2007
Katie, we really don't know that the client is stationed in CA. He may be stationed elsewhere.

KatieJ (talk|edits) said:

3 October 2007
It doesn't matter whether he is stationed in CA or not. My assumption was that he is stationed here when not deployed overseas. If he is in the Navy he is considered stationed at the home port of the ship, whether it is at the dock or on Westpac. But no matter where he is stationed at any particular time, California will not treat him as a tax resident as long as he keeps his military home of record in Ohio and is on active duty. If he retires or otherwise separates from service, however, he will become an instant resident (unless he pulls up stakes and moves elsewhere shortly thereafter).

There are some folks on the FTB staff who would dearly love to treat military personnel who stay in California for extended periods, marry, send their children to public school, own homes, buy and sell real estate, etc. as tax residents. About 15 years ago (maybe it was 20) they promulgated some changes to the Volunteer Tax Assistant Program military supplement and FTB 1032 to indicate that a military member who established ties to California OTHER THAN just being stationed here would be a resident. The Pentagon sent a lawyer, Pat Kusiak, to explain to the 3-member Board that they couldn't do that. (Pat later retired from the Navy and joined the FTB legal staff!) The Board quickly backed down. One problem is that many other states, like Ohio before 2007, tax 100% of a resident military member's compensation, no matter how long he or she is absent from the state, and the Pentagon will not withhold tax for more than one state.

Riley2 (talk|edits) said:

3 October 2007
Forgive my ignorance, but isn’t true that a California domiciliary military person can be taxed by the FTB while he is stationed in California under PCS orders? The Serviceman’s Civil Relief Act does not, as far as I know, change that rule. The declaration of Ohio as the resident state is not dispositive, as far as I know.

I do agree that being stationed in California does not cause a non-California domiciliary military person to be treated as California resident. R & T § 17140.5(c)(1).

Quoting directly from Legal Ruling 300 “…..(2) Unless out-of-state military personnel adopt California as their domicile of choice the Board cannot tax them even though they are serving at California posts of duty. If a California domicile is adopted, however, the Board can tax them on their entire income during periods of service at California posts of duty. (3) Declarations of legal residence are now being obtained by all branches of the service from their personnel. A declaration showing California as the legal residence will be treated as presumptive evidence of California residence unless proof is submitted to dispel the presumption.

Based on Legal Ruling 300, I would conclude that a California domiciliary is treated as a nonresident of California while he is stationed outside of California, but would be treated as a CA resident while stationed in CA.

Michaelstar (talk|edits) said:

3 October 2007
KatieJ - So far I agree with everything you have posted here but my take on FTB Pub 1032 (up to this point) is that if the t/p is married at least 1/2 of the non-resident, military member's taxable wages are going to be subject to being taxable in CA during that time that the "family" unit lives in CA.

Should the non-resident military t/p receive orders overseas and the family stays in CA, I believe that 1/2 of the taxable wages will be taxable income for CA purposes as well.

What is your take on this?

KatieJ (talk|edits) said:

3 October 2007
Yes, Riley, you have all that exactly right. The difference is the domicile. A person who joins the military while domiciled in California does not lose his or her domicile while on active duty, unless he or she takes positive steps to change it. Unlike Ohio, though, California treats a California domiciliary as a resident only when he or she is stationed in California (or, to the annoyance of sailors, stationed on a California-home-ported ship, no matter where it goes). Once the member leaves California on PCS orders, he or she becomes a nonresident under the normal California statute, because he or she is absent from the state for a purpose that is not temporary or transitory (CRTC Sec. 17014). In fact, there is no guarantee that a California-domiciled service member will ever be stationed in California during his or her military career.

Carbon's client, though, is not a California domiciliary. It appears that his military records show Ohio as his home of record (otherwise it would not appear on his W-2). He will not be a California resident until he (a) changes his home of record to California or (b) separates from service.

It is fairly common, I believe, for military members to change their home of record to California just before being transferred elsewhere on PCS orders. If their original home of record is one of those "grabby" states, like Ohio, they can get out of being taxed as residents there by becoming California domiciliaries. Then they will be nonresidents when not stationed here, and of course will also be nonresidents of the state of original domicile. Presto, no state taxes!

Of course domicile and home of record are not necessarily the same thing, and if one looked at all of the facts and circumstances, one might reasonably conclude that a person like Carbon's client had actually established a California domicile even though he had not changed his home of record. But as I said above, home of record is a convenient proxy for domicile, and the states generally, and California in particular except for that one spasm that was quickly squelched, have not pushed that issue. It's extremely unlikely that any state would do so in time of war.

KatieJ (talk|edits) said:

3 October 2007
Michael, you are right that the civilian spouse is considered a California resident from the time he or she comes here with the nonresident military member on PCS orders, and if he or she stays here while the member is deployed elsewhere, he or she remains a California resident. However, if the military member is domiciled outside California, NONE of the military compensation is included in the calculation on the 540-NR, even if the couple's domicile is another community property state. That is a consequence of the 2003 revision of the SSCRA.

If the member is domiciled in California, the resident spouse's community 1/2 of the military compensation is subject to California tax even when the member is stationed elsewhere.

Again, it all depends on the domicile of the member.

Bushmaster (talk|edits) said:

3 October 2007
Let me address this. I doubt this guy is a Special Forces soldiers living in CA between deployments. 1st of all, the US Army doesn't have any SF units located in CA. Next, you don't just go somewhere to live, then come back and hop on a plane for deployment to a foreign land. Does NOT happen.

The income he earns from WITHIN the state of CA, like the land sales gains, are taxable in CA. Just like anyone living in one state and sells property in another state. For all intents and purposes, this guy lives in Ohio year round, and that is where his W-2, interest income, dividends, and such will be taxed. If any income or deduction can be attributed to another state (like property sales, rental income), that income or loss belongs to that state.

Also, I have NEVER heard of Army folks changing their residence to CA prior to PCS or deployment. Why do that? Why not change it to Florida, Texas, or Tennessee and avoid the state tax issue all together? Or Michigan, which I think exempts military pay from tax.

Bushmaster (talk|edits) said:

3 October 2007
Oh yeah, Katie and Riley are spot on.

Carbon2 (talk|edits) said:

3 October 2007
Bushmaster

Client is a SEAL. Not SF. Historically deployed 4 - 9 months a year, which is expected to continue. Deployment would exclude portion of his income from CA anyway. With Sch. A i & prop tax, not much left to tax.

The question comes about as client is taking a priciple residence gain exclusion, property located in CA- 2006 $237K gain, single at time of sale, yet still OH resident. Seems to be a potential contradiction. He has not been back to OH in 8 years.

Bushmaster (talk|edits) said:

3 October 2007
OK. You mentioned above that he was Special Forces.

If he is claiming OH as his residence as his W-2 shows, then he is an Ohio resident. The gain exlcusion for sale of home would still apply even though he is an OH resident living in CA. CA may have some weird and quirky rules about sale of home that I am unfamiliar with.

Riley2 (talk|edits) said:

3 October 2007
Interesting discussion. My father was a career military person who, for 20-years, declared California as his state of residence -- even though he had never stepped foot inside the state of CA. He was actually domiciled in Missouri.

KatieJ (talk|edits) said:

3 October 2007
Bushmaster, the reason service people change their home of record to California before being transferred elsewhere, rather than to Texas or Nevada, is because, I have been told, generally the military will not change your home of record to a place where you are not stationed at the time the change is made. Of course that may differ depending on the branch of service, the individual case, or what the JAG officer had for breakfast. It's entirely up to the military.

Carbon, are you filing Ohio income tax returns for this client? He is a resident there, taxable on all of his income (except excludable combat pay, etc., and beginning in 2007, all of his military compensation).

The California house is still his principal residence, since he does not maintain a place of abode in Ohio (or anywhere else, I take it). The location of the principal residence would be a fact to be taken into account in determining his tax domicile or residence, but it is not determinative, and the special military rules effectively negate it. I presume your client is primarily stationed at a California base to which he returns when not deployed overseas.

Carbon2 (talk|edits) said:

3 October 2007
KatieJ- yes on the OH tax. Client is CA stationed & will change domicile to CA for 2007.

Riley2 (talk|edits) said:

3 October 2007
The declared state of residence does not really establish domicile. Nor does it have any bearing on the definition of the term "principal residence." Thus, I see no problem with a nondomiciliary of CA claiming a Sec. 121 exclusion on a CA residence.

KatieJ (talk|edits) said:

3 October 2007
Carbon, why change to CA? Is he going to retire in 07? As long as he is on active duty, he can keep his OH domicile. Since OH won't tax his military compensation from 07 on, that's not really such a bad deal. If he changes his home of record to CA, he'll be subject to CA tax on all his military compensation that isn't excluded as combat pay, etc.

Bushmaster (talk|edits) said:

3 October 2007
Katie, you didn't answer the question? Does CA not tax military pay if you aren't physically in the State of CA? If that is not the case, then there would be no reason to change residence.

KatieJ (talk|edits) said:

3 October 2007
A California domiciled military member is a nonresident when absent from California on PCS (Permanent Change of Station) orders. I am not personally familiar with the form of orders that are given to members who are deployed overseas in combat zones, but unless they are PCS orders, they would not make a California domiciled member a nonresident. The California statute defines a resident as a person who is either present in California for a purpose that is not temporary or transitory, or domiciled in California and absent for a temporary or transitory purpose. A combat deployment may be a temporary assignment -- I'm not sure about that, but it seems logical.

It's not just a matter of being absent from California; in order to be a nonresident, a California domiciled member must be absent due to a permanent change of station. If a California domiciled SEAL is permanently stationed in California, and temporarily assigned to an overseas location but scheduled to return to his California base at the end of the assignment, he is not a nonresident when absent.

Bushmaster (talk|edits) said:

5 October 2007
OK. I understand you now. PCS orders are not given when you deploy to a combat zone. PCS is when you are stationed at XXXXX and the DOD (Army, Navy, etc) says you will not be stationed at YYYY. A combat zone would not qualify. (Thank God!!)

KatieJ (talk|edits) said:

5 October 2007
Which gets me back to the question I asked Carbon2: Why change your client's domicile to CA? He's better off as an OH resident, and he can stay that way as long as he is on active duty. As a CA resident, he'll be taxable on all of his military compensation apart from combat zone etc. exclusions. As an OH resident, all of his military compensation is exempt after 2006.

Carbon2, please fill out your profile. Click on your own name anywhere and it will take you there, and you can edit it.

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