Members of the military are usually taxed in their state of legal residence rather than in the state where they’re stationed.

Ex: Vic has a home in Littleton, New Hampshire, but he’s stationed at Fort Drum, New York. If Vic proves he’s a legal resident of New Hampshire, he must file as a New Hampshire resident rather than as a New York resident.

You usually must prove you reside and intend to continue residing in a state to establish legal residence. However, each state has its own set of rules for proving your intent to legally reside in a state. These actions can help prove your residency:

• Getting or keeping your driver's license
• Registering your vehicle(s)
• Paying state taxes, like income or property taxes
• Registering to vote

Tax Rules for Military Income

Members of the military receive many different types of pay and allowances. For federal tax purposes, some types of pay and compensation are included in gross income, while other compensation isn’t.

Pay and compensation included in gross income include:

• Active-duty pay
• Hardship-duty pay
• Bonuses

Pay and compensation not included in gross income include:

• Moving allowances
• Combat-zone pay
• Disability pay

To learn more, see IRS Publication 3: Armed Forces' Tax Guide.

While some states follow the federal tax rules regarding the amount and types of compensation excluded from gross income, other states don't.

Ex: Connecticut follows the federal tax rules, while Arkansas excludes only the first $9,000 of military compensation from gross income.

Due to the Military Spouses Residency Relief Act in 2009 (MSRRA), spouses of military members are now taxed much the same as military members. Under this act, military spouses can maintain their original states of residence. This is true even though they move to states where their spouses are stationed. These requirements must be met:

• The spouse accompanies the military member to a duty-station state outside the home state. The military member must be obeying military orders.
• The spouse is in the duty-station state solely to be with the military member.
• The spouse is a legal resident of the same home state as the military member.

If non-military spouses meet these 3 requirements, their earned income while in the duty-station state won't be taxed by that state. This applies even if such income might be subject to taxation in a spouse's home state. Similarly, a spouse's property isn’t subject to taxation in the duty-station state.

MSRRA, which took effect in 2009, is an expansion of the Servicemembers Civil Relief Act (SCRA). That act exempted service members' military income and property from taxation in multiple states.

So, the military income earned by the service member and the non-military income of the spouse are exempt from state taxation in the duty-station state. However, to apply, all 3 MSRRA requirements must be met. Both spouses are subject to income and property taxes in their home state.

To learn more, visit your state's tax office website.