Provides that a service member does not lose or acquire a residence or domicile for tax purposes with respect to his or her person, personal property, or income due to being absent or present in any tax jurisdiction in the U.S. solely to comply with military orders. Further, military compensation is not considered income for services performed or from sources within a tax jurisdiction of the U.S. if the service member is not a resident of or domiciled in the jurisdiction in which he or she is serving.

A state (or other tax jurisdiction) may not use the military compensation of a nonresident service member to increase the tax liability imposed on other income earned by the nonresident service member (or spouse) that is taxed by the state or other jurisdiction.

Added 50 U.S. Code Sec 4001(a)(2)(B), for any taxable year of the marriage, permits the spouse of a service member to elect the same residence for purposes of taxation as the service member regardless of the date on which the marriage of the spouse and the service member occurred. The election shall apply with respect to any return of State or local income tax filed for any taxable year beginning with 2018. Previously, under the Military Spouses Residency Relief Act of 2009, a military spouse could claim the same resident state as the service member only if the spouses had the same domicile and the nonmilitary spouse moved to be with the service member.

Benefit - The benefit of this election is that a spouse of a servicemember stationed in a high-income tax state can elect the state of residency of the servicemember whose resident state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.

CAUTION: The Veterans Auto and Education Improvement Act of 2022 (VAEIA) (see next) has replaced this provision with an even more liberal residence provision for both the service member and the service service member’s spouse. However, the legislation was sloppily written and until Congress provides further guidance it is unclear if the VAEIA is effective in 2022 or 2023.

As the title implies this legislation includes several educational and other benefits for veterans. However Sec 18 of the legislation modifies Sec 511(a) of the Servicemembers Civil Relief Act of 2003, providing substantially more liberal residency options for service members and the service member’s spouse.

Under the new law, which became law Jan. 5, 2023, service members and their spouses, regardless of the date on which the marriage of the service member and the spouse occurred, are allowed to elect the state in which they pay income taxes from three options, the:

The Act also expands to spouses a residency protection already offered to service members that allows them to remain tied to a former legal residency, even if they no longer physically live there.

Thus, if the service member and spouse were to be stationed in a state that has no income tax, or low-income tax rates, they can continue to claim that state as their legal residence after moving away, provided they met legal residency requirements while living there.

As noted above, the legislation does not specify the effective date of this change (2022 or 2023) and is unclear whether the military spouse and the service member will be required to file their taxes in the same state. Also not specified is if taxpayers will be able to switch the states in which they file year to year. The IRS (or Congress) will need to provide clarification.

CAUTION: There are unanswered questions not covered in the legislation. Can the service member and the spouse elect to use different states in the same year if advantageous or can they elect different states from year to year? We will update this material when these questions and the effective date are clarified.