Disclaimer: All the information in this article is for general knowledge and does not constitute legal advice. Seek professional guidance from credentialed tax preparers if you have questions when preparing your tax returns
The tax season is upon us once again. On Feb. 12the Internal Revenue Service will begin accepting and processing returns.
So, the sooner you file your return, the sooner any refund you are owed will be sent out. Whenever possible, it’s best to file electronically and perhaps expedite that refund.
Whether military or civilian, the first thing is to get all your documents in order. If you do your own taxes with the help of computer software or hand the task to a professional, your documents are critical.
Employers are required to send out W-2s to their employees by Feb. 1, so you should have yours by the weekend. And you should have all of your 1099s from entities that contracted you or from your financial institutions concerning your remunerations and income from interest dividends, cryptocurrency, and securities transactions. You should also have by now documents pertaining to deductions such as a 1098 Form concerning interest you’ve paid on your mortgage and on student loans, or other such debts.
If you didn’t get these documents in the mail or in electronic format, be proactive. Don’t wait. Many can be downloaded and are easily accessible. Some of these documents can save you money by reducing your taxable income
In a previous article, I covered some issues for military taxpayers concerning taxable income and the exclusions for combat pay. Now, I would like to touch on a central question that has many legal ramifications: your domicile.
What Is a Domicile
This legal term simply means your residence according to legal definitions. For civilians, it is the home you intend to inhabit for an indefinite or unlimited period as your main abode, and to which, when absent, you intend to return. It isn’t always where you presently live.
For servicemembers who move around all the time, the federal legislators changed the rules. If the military sent you across the country or around the world on assignment, your permanent legal home or “Home of record” (HOR) is most likely the state or territory where you lived when you first joined the military.
The HOR is important because the military will use it to determine your benefits such as travel allowances, transportation expenses, travel time to report to duty, and so forth. But you will use the HOR to determine which state or territory you will pay taxes to, if at all.
This last point has important financial implications. Some states have a lower state income tax rate than others and some have no income tax at all.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income tax. Tennessee and New Hampshire tax interest and dividends, but they will be phasing them out in the near future. Conversely, California, New York, New Jersey and Connecticut have high income and real estate taxes.
If you want to change your HOR, you need to change your life to a new state; that is, you must be physically present in your new state for a prescribed amount of time, usually some time more than half a year. Also, you must intend to remain in your new home state permanently or treat that location as your permanent home even though you will be stationed in different places for some periods of time. Finally, you must intend to abandon your former home of record.
It is very important not to do this without thought. Changing your HOR without fulfilling the legal requirements of both states can lead to serious disciplinary actions or, worse, and include hefty fines. Consult your CPA or attorney on this issue.
Civilian Spouse Domicile
The IRS has made clear that “If you are the civilian spouse of an active-duty U.S. military service member and your domicile or residence is the same as the service member’s, you may be able to keep your prior domicile or residence for tax purposes when you accompany your spouse who relocated to a new duty station.”
There is room to claim the opposite too, and allow the active servicemember to claim the domicile of the spouse. Again, these decisions should be taken with care after consulting professionals on the financial ramifications and the best way to achieve this move from the legal perspective.
All this talk of residence and moving from place to place brings us to a recurring issue for many military families: moving expenses. This is important to keep track of since you may be able to deduct some moving expenses from your taxable income and exclude some reimbursements too.
To deduct moving expenses, IRS publication 3 says you must be a member of the Armed Forces on active duty and, “due to a military order, your move must be the result of a permanent change of station.”
Some expenses should not be included in your income. For example, if you were reimbursed by the government for the value of moving and storage services provided or if the government provided this service directly to you, that reimbursement does not count as income.
The same is true for a dislocation allowance, temporary lodging expense, temporary lodging allowance, or move-in housing allowance. All these should not be included.
What if you got from the government reimbursements that were more than you actually used? Generally speaking, the excess should be included in your wages box on the W-2 form. If by mistake the reimbursements or allowances (other than dislocation allowances, temporary lodging expenses, temporary lodging allowances, or move-in housing allowances) exceed the actual costs of moving, you must include that in gross income on Form 1040.
If you have questions, there are many valuable resources on the Internal Revenue Service website and also on the websites of the various companies that provide tax preparation software. Take advantage of all that help and specifically the resources that are offering free or at reduced fees for servicemembers.
Happy tax season! Be proactive and tackle this annual chore early. Don’t wait until the last minute.