Discussion:Military pay exempt from New Jersey income tax

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Discussion Forum Index --> Basic Tax Questions --> Military pay exempt from New Jersey income tax


Discussion Forum Index --> Tax Questions --> Military pay exempt from New Jersey income tax

Fps (talk|edits) said:

24 February 2010
I have a client who resides in California and is active duty Navy. He is married and his wife is a California resident earning California income. We are filing a non-resident California income tax return for them and only including the wife's income for California purposes. He is claiming New Jersey as his residence and has no witholding for New Jersey income tax. He maintains that New Jersey is one of two states that do not tax military pay. My research shows no such exemption of military pay (non-combat) from New Jersey income tax. He maintains that H & R Block provided him this information. Any help would be appreciated.

Jctmstx (talk|edits) said:

24 February 2010
New Jersey taxes military pay if you are a resident of that state and stationed in that state! You did'nt say where he is stationed.

Fps (talk|edits) said:

24 February 2010
He is stationed on a ship home based in California. Researching New Jersey law, it appears they tax military pay earned outside New Jersey if you claim New Jersey as your residence. As previosly mentioned, he is claiming non-resident status in California. Thanks for the assist.

KatieJ (talk|edits) said:

24 February 2010
Fps, there are a couple of things you are missing here.

First, if your client's military home of record is New Jersey, he remains a resident of NJ under NJ law unless he meets all of three tests: (1) he is not present in NJ for more than 30 days of the taxable year; (2) he does not maintain a permanent place of abode in NJ; and (3) he does maintain a permanent place of abode outside NJ. N.J. Rev. Stat. §54A:1-2(m). As long as your client meets those three tests, he is a nonresident of NJ and is taxable there only on income from NJ sources -- such as income from real or tangible personal property located there.

Second, under the federal Servicemembers' Civil Relief Act as amended in 2009, effective for tax years beginning in 2009, if your client's civilian spouse is also domiciled in NJ, she is not a California resident and does not have California source income from the performance of services in California.

Death&Taxes (talk|edits) said:

24 February 2010
"He maintains that New Jersey is one of two states that do not tax military pay"

Maybe he is confused with Military pensions

Fps (talk|edits) said:

24 February 2010
Katie, here is some addtional info regarding this issue.

Client is originally from NJ and became stationed on a ship in San Diego a number of years ago. He married a CA resident and purchased a home and started a family here in San Diego. Spouse works in San Diego and maintains the household while he is deployed.

From everything I know and have read, he is a CA resident for CA purposes and not a NJ resident since his "permanent place of abode" is CA. The client was told by someone several years ago that as long as he maintains that NJ is his residence then he does not have to pay CA income tax and NJ income tax since he is in the military workiing outside of NJ.

I want to make sure I am on good grounds when I have to inform them that he has to be a resident of some state and it looks like CA. Unfortunately, the prior tax preparer has been filing CA non-resident returns (excluding his income) and not filing anything with NJ. Thanks for your insight.

Death&Taxes (talk|edits) said:

24 February 2010
You might refer to this: http://www.military.com/benefits/legal-matters/scra/overview

Chris2lane (talk|edits) said:

February 24, 2010
Forgive my ignorance in regards to active military pay, but I find it hard to believe that he's married, started a family, and bought a house in Ca., yet taxpayer insists he's not a taxpayer of Ca. Sounds like he's trying to circumvent paying state tax to all involved.

Chris2lane (talk|edits) said:

February 24, 2010
Straight from the NJ Division of Taxation, this link might help, [1]

NoVATaxes (talk|edits) said:

24 February 2010
I believe your client is correct. Although he remains a NJ resident because his home of record upon entering active duty military is NJ, NJ allows him to be classified as a non-resident because (1) he did not maintain a permanent home in NJ; (2) he maintained a permanent home outside of NJ; and (3) he did not spend more than 30 days in NJ (Form NJ-1040 Instruction Booklet, pages 9 and 10; N.J. Rev. Stat. §54A:6-7). Furthermore, he is not a CA resident because CA specifically allows an individual who is only in CA by virtue of military PCS orders to be non-residents [California FTB Pub. 1032, Tax Information for Military Personnel; Cal. Rev. & Tax. Cd. §17140.5(c)(4); Cal. Rev. & Tax. Cd. §17140.5(f)]. Ergo, his active duty military pay isn't taxed by NJ or CA. If he has other income sourced in CA, however, he would have to pay taxes on that.

The point about his having bought a house in CA would make him a resident might not be automatically determinative. Because of the Servicemember's Civil Relief Act, the mere act of a member purchasing a home in a State doesn't necessarily make that state his domicile. Now, if he's registered to vote in CA, registered his vehicles in CA, and got a CA driver's license, then it's arguable he's made CA his domicile, and thus subject to CA income tax as a resident.

While it seems strange the military pay isn't being taxed by any state, it's actually quite common for active duty military members. I should know; I was one.

KatieJ (talk|edits) said:

24 February 2010
NoVATaxes is correct. The Servicemembers' Civil Relief Act prohibits states from considering a service member to have changed his or her domicile or residence for tax purposes by virtue of being stationed elsewhere under permanent military orders. California went through quite a gyration, about 20 years ago, when some folks (staff) at the FTB decided that service members who bought homes, sent their children to school, etc., etc. went beyond the limits of SCRA and should be treated as residents for tax purposes. The Pentagon sent a lawyer (Pat Kusiak) to explain its interpretation of the federal law to the three-member Franchise Tax Board. (Pat later went to work for the FTB and is still there -- a great guy to work with!)

Many states, unlike California and New Jersey, consider their domiciliaries to remain residents for tax purposes and tax all of their income, including their military compensation, as long as their home of record has not changed on their military records. If a domiciliary of such a state were stationed in California, and California considered him or her to be a resident because he was in California for more than "solely" military purposes, theoretically the Pentagon would have to withhold income tax for both states. But the Pentagon will not withhold for more than one state. Pat was able to persuade the FTB that it should not adopt its proposed approach, and the whole idea was dropped.

Fps, your client is not a resident of California. He is not a resident of New Jersey either. As NoVATaxes points out, this is not unusual in the military context. It doesn't matter what else he has done in California, not even registration to vote. Forget it, he's not a resident of any state.

If your client's wife were also domiciled in NJ, she would not be a California resident either. Further, her compensation for services performed in a civilian job in California would not constitute California source income. (Oddly, if HE had a part-time civilian job, HIS non-military compensation would be taxable in California. But the spouse's is not. Seems to be a glitch in the drafting of the 2009 amendments to SCRA.)

Since your client's wife was a California domiciliary before the marriage and has not established a domicile in NJ, she remains a CA resident. All of her income is subject to California tax. Because the client is active duty military, they have the option of filing jointly or separately in California regardless of their federal filing.

Fps (talk|edits) said:

25 February 2010
I love it. Thanks to all for your insight.

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