The Veterans Auto and Education Improvement Act of 2022, passed on Jan. 5, 2023, brings updates to domicile laws. Previously, the spouse of a military taxpayer could use the military taxpayer’s domicile for tax purposes. Now, the spouse can use either their state of residence, the military taxpayer’s state of residence or the permanent duty station of the taxpayer.
How can this benefit your clients?
When determining domicile, which impacts state taxes, a spouse of a service member can choose which state to claim as their domicile assuming it is either the state they call home, the state the service member’s residence or the state of the service member’s permanent duty station.
Example of application
We have Bethany, a service member, and her spouse Alex, who is not a service member. Combined, their taxable income is $85,000. Bethany has determined her state of domicile is Minnesota, which has an effective tax rate of 5.29% and her permanent duty station is in South Dakota, which has no state income tax.
Alex resides close to his family in Alabama, which has an effective tax rate of 4.07%. Alex can use the election to claim domicile in South Dakota for tax purposes, as it is Bethany’s permanent duty station. This election can potentially save Bethany and Alex nearly $4,000 in state income taxes (average of 4.68% between Minnesota and Alabama taxes, $85,000 taxable income, no exclusion for military service income in MN or AL assumed).
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.