Military Spouses Residency Relief Act: it’s gonna cost us

An article in Monday’s newspaper about the Military Spouses Residency Relief Act (MSRRA) struck me, at the time, as a case of missing the forest for the trees.

The act, passed on Veterans Day, will extend residential benefits to spouses of military personnel, allowing them to retain residency in their home state for tax and voting purposes.

While the article focused on personal property taxes (the trees), what immediately jumped out at me was the larger impact on the revenues of the Commonwealth (the forest).  If a spouse is allowed to claim residence elsewhere while working in Virginia, the income taxes that would heretofore have been paid to Virginia would go elsewhere.

According to the most recent information I could find (pdf), Virginia ranks 5th in the country in terms of the percentage of residents who are active duty military or in the reserves/guard. That same report shows that Virginia ranks third in terms of enlisted personnel, with approximately 109,000 members. Another source estimates Virginia’s total military personnel at 124,000, with approximately 40,000 of those being reserve and national guard. Maryland, which has approximately 57,000 total military members with approximately 26,000 being in the reserve and national guard, estimates the cost to the state for this change in the law to be $5 million. I was unable to readily locate any statistics on the number of returns filed in Virginia by spouses of active duty military members.

My experience tells me that many active duty (AD) service members claim a home of record in a state that doesn’t have income taxes – Texas for Army members, Florida for Navy members – or, as has been increasingly the case, states that do not tax the military member if they are not in the state during the year, like New York or Ohio. Virginia is one of the states that continues to tax the military pay of AD personnel if the Commonwealth is the home of record.

Until the passage of the MSRRA, spouses were taxed wherever they earned their income. Monday’s article sent me hunting for the law and the interpretation of it. What I found isn’t pretty and leaves me wondering: did anyone in Washington actually think this through before this bill became law?

It appears to me that the intent of this law was to simplify things for AD members by allowing their spouses to claim the same home of record. But that wasn’t the way the law was passed. The best explanation I have found for the law as it stands is that provided by the Reserve Officers Association. The examples there are quite clear and the conclusion sobering for those who thought this law was going to make life easy:

The new law is good news for some military families, but because of the way that the law was drafted most military families will not benefit.

I doubt if many people will follow the examples and instead simply claim that their home of record is in a state other than Virginia. (In fact, I’ve already seen, in my research for this article, people advocating claiming a state of residence to which they are not entitled to and letting the states try to catch them.) Although the Virginia Department of Taxation has released a tax bulletin (pdf) saying that they are collaborating with other states on the implementation of the law, my research tells me otherwise. A number of states have already issued guidance, among them:

  • Kansas (pdf) places the burden on the employers to determine if the spouse is a resident of another state.
  • California
  • Colorado (pdf)

I see so many problems with this new law that I’m in the process of contacting my representatives and asking them to reconsider it. The first is that the law was passed so late in the year and is applicable to this tax year, giving the states little time to get things in place.  If other states follow the lead of Kansas and place the burden on the employers to determine the residency, where is the guidance on that for the employers? If the burden is placed on the states themselves, how do they intend to track down and verify that those who have claimed the exemption are entitled to it?

Already Virginia is constantly tracking down people with Virginia addresses who haven’t filed returns here. The numbers just go up dramatically with this new law. Another 50,000 – 60,000 returns to look for?

Which brings me to the second point: will Virginia receive additional federal funds for the impact of the lost revenue as well as the additional resources that will be required to track down and determine if the person claiming exemption is entitled to it? If not, this becomes another unfunded mandate placed on the Commonwealth.

Finally, for those spouses who end up claiming residency in states where there is an income tax, this law places a burden on them to make estimated income tax payments in that state. The federal government may be able to withhold income taxes in every state (and locality) that charges them but small businesses simply cannot. Given that the law, as it stands, is in effect for this year, will the states waive the underpayment of estimated tax penalties?

There is no doubt in my mind that the effective date of this legislation needs to be pushed back.

And I have a fairly simple fix to avoid the extra work for the states: an alteration of the W-2. Put a box on there that, if checked, indicates that the employee has claimed exemption from tax in the state in which they work. And put a field next to the box capable of handling the two-digit state code for the state of residence the employee is claiming. Every state requires copies of the W-2 to be sent to them. With a bit of programming, the states could then determine which employees are claiming the exemption and the state in which they are claiming residency, thereby avoiding the “where’s your tax return” notices that get sent out. (And, of course, require all but the smallest employers to file their W-2s electronically.) Updating the W-2 is something that the software vendors are used to doing. The state withholding form (in Virginia, form VA-4) would need to be updated to capture this information as well.

But that can’t happen overnight – certainly not between now and the time that W-2s are required to be filed.

If the effective date of the legislation is not pushed back, I can see this bill costing Virginia millions of dollars at a time when we can least afford it.

Oh – and the effect on personal property taxes? I’m surprised that anyone with an AD spouse has been paying personal property taxes.

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33 thoughts on “Military Spouses Residency Relief Act: it’s gonna cost us

    1. I helped work on this legislation and after I read your piece which was brought to my attention, I felt I must respond.

      My first question to you, is…do you have to move every two years? Do you have to file taxes in mulitple places because every place you’ve ever lived feels entitled to a piece of your earnings? Have you ever NOT worked in your chosen career field, because you didn’t want to be involved in long and arduous tax issues? These are just a few of the burdens on military families that have been going on since I was a child in a military family.

      We move on federal orders, just like our spouses. We move as a unit. We do not have a choice.

      I can guarantee you that there has not been a HUGE run to the “non” tax states such as FL & TX…just the opposite has happened. People WANT to pay taxes to the state that they happen to be from. They want to vote for THIER representation. They want to feel a part of their own community, to file ONE tax return and not have to be hassled with changing Drivers license and registration every time they move. It’s been an unfair burden that now has been fixed.

      You must also understand that the spouse has a CHOICE to align with the spouse’s home state or she/he can align with the HOST state, so VA stands to gain as much as any other state.

      The SCRA has always covered the military member and rightly so…and finally, the MSRRA does the same for military spouses.

      VA receives A LOT of money from military families. The impact aid form that I fill out each year guarantees more money for the county that I live in. That along with the houses we buy, the grocery stores and retail outlets that we are patrons of, ensure that money is indeed being infused into your local economy.

      This isn’t an unfair burden on the state of VA, any more than it is on CA, Iowa or Ohio. This is a fair, and equitable move on the part of the gov’t to take care of it’s own.

      It’s unfortunate that you are willing to unfairly burden military families who are serving this country and believe me…your sentiment, is why so many families FLEE the state of VA when their service is over. The assumption that military families OWE the state of VA is beyond the pale…I’m just ecstatic the new GOV of VA is a former military member.

      To finish…this legislation was in the works for over 3 years. The representation from the state of VA did not co-sponsor the legislation, but when the time came to make any objections, there were NO takers. There were many, many opportunities for states to make their opinions known. It didn’t happen.

      It’s an offensive idea that you would try to somehow get this legislation pulled back. I do see even more change coming, but it will be “clarified” and not retracted.

      Virginia is hurting financially, just like every other state in the USA. That doesn’t mean it’s time to challenge those who are serving this country.

    2. For Immediate Release
      November 11, 2009
      Statement by the President on S.475
      Today I have signed into law S. 475, the “Military Spouses Residency Relief Act”. This Act, among other things, would provide that when a service member leaves his or her home State in accord with military or naval orders, the service member’s spouse may retain residency in his or her home State for voting and tax purposes, after relocating from that State to accompany the service member.
      When the military orders service members to move, spouses who move with them often have to pay taxes in a new State or locality and lose the right to vote in the place considered to be home. This legislation will alleviate these and other burdens on our military families. As the Congress has recognized, and as the legislative history reflects, this legislation is an important means of maintaining the morale and readiness of our Armed Forces and significantly enhances the ability of our military to effectively recruit and retain these highly valued service personnel.
      BARACK OBAMA
      THE WHITE HOUSE,
      November 11, 2009.
      The President wholeheartedly supports this law as I am sure the majority of other Americans do as well.

      Among a wide range of protections, the SCRA allows a servicemember to maintain his or her residency for certain purposes, such as voting, income taxes, and personal property taxes, in a state from which the servicemember is absent in compliance with military orders. These protections essentially allow a servicemember to retain a `home’ state while he or she is ordered to new locations by the military and to avoid many of the difficulties, burdens, and distractions associated with a permanent change of duty station. The MSRRA has amended the Servicemember’s Civil Relief Act of 2003 to add specific protections to Servicemember’s spouses. The bill passed both the Senate and House with ample discussion and forethought and minimal, if any, objections.

      In reality, the SCRA as amended provides only 3 additional protections to military spouses:

      1. In certain circumstances, allows the spouse of a servicemember, for purposes of voting in Federal, state, or local elections, to retain residency in a state from which the spouse is absent.

      2. In certain circumstances, allows the spouse of a servicemember, for purposes of income taxes and personal property taxes, to retain residency in a tax jurisdiction from which the spouse is absent.

      3. Suspends certain residency requirements for the spouse of a servicemember seeking to exercise certain land rights, such as mining claims or homesteading, on public lands.

      These Civil Rights have been provided to military members for a long time. This new revision of the SCRA simply recognizes and protects their spouses in the 3 areas noted above. The protections for military spouses should have happened long ago. The effect on revenues of individual states is not an issue. The states should have never been entitled to the revenues in the first place so to ask, “…will Virginia receive additional federal funds for the impact of the lost revenue as well as the additional resources that will be required to track down and determine if the person claiming exemption is entitled to it? If not, this becomes another unfunded mandate placed on the Commonwealth.” holds little or no weight.

      To those who serve, thank you. To those who maintain the home front for our servicemembers, thank you. You both deserve and now have a legally protected Home!

  1. One other thing I failed to mention in the article: the difficulty of re-establishing residency. Many hurdles here: the multiple offices they have to deal with (DMV, voter registration, etc), trying to do it long distance, the requirement of some states that you have a permanent address in that state when you have no home there, among others.

  2. Maybe it’s time for Virginia to do the right thing and to stop taxing military income. When i was active duty, lots of Navy personnel couldn’t get out of Virginia fast enough, mostly because of the taxes.

    1. Maybe – but then the overall tax rate would have to go up, right? Because nothing is free and the services that are provided would still have to be provided.

      A lot of people miss that Virginia has a nickel-and-dime-you-to-death approach to taxes, whereas other states have a grab-it-all-in-one-chunk approach. Personally, I favor the former over the latter simply because it’s a much broader base: a little from everybody rather than a lot from a few.

      And last time I looked, Virginia was something like 47th in overall tax burden.

      1. Don’t pretend that the military is not a net plus for Virginia. It will still be a plus even if we don’t tax military income or personal property.

        As you point out, and assuming you are correct, Virginia’s tax burden is already low. (Perhaps that’s why we keep getting Forbes’ Best State for Business award.) Raising the taxes a bit so that the military are not taxed (as if they make a lot of money anyway) is not that big of a burden.

        BTW, how many retirees were screwed by the State when their military retirement income was improperly taxed?

          1. NO, they did not. The State allowed for a group settlement of about half of what was owed. Most took that deal, because the State was doing everything it could not to repay, and retirees were dying waiting for their money.

        1. Oh, and pointing out that the tax rate would have to go up isn’t saying anything about the value of the military.

          Given our current political and economic climate, an increase in the tax rate is a non-starter.

      2. Perhaps a silver lining to this cloud will be the military spouses stationed elsewhere being allowed to change their residency back to VA? I can’t help but wonder how many will do that. Probably hundreds, maybe in the thousand? If you are correct that VA is 47th in tax burden, then most likely VA income tax is lower than whatever state they are contributing to at this time – prompting them to revert back to VA – thereby offsetting the total effect.

        It’s likely the net effect will be much less than $5M, and either way it’s still several decimal places less than the overall positive economic impact of the huge military presence in the state.

      3. Your right Ms. VIP. Nothing is free~ Therefore, freedom is not free either. It comes with a high price for our fallen comrades.

        I find it disturbing that we (the military) are good enough to fight for our countries freedom and way of life but Virginia is only interested in how else can we “nickel & dime” the active duty and their spouses. Perhaps this is the way some Virginia appreciates the Military…

        Doesn’t Virginia already benefit from the military by the simple fact of our presence in Virginia? If your figures are correct, what would happen if all of the “Military” community left Virginia?

        Again, nothing is free in Virgina, but I am now authorized to claim my great state of Texas for free…

        1. You forgot to hum “Proud to Be an American” while you typed that, Retired Vet.

          The idea that Virginia is some sort of high tax/high burden state for military families is laughable (so laughable, in fact, that I never responded to the post below because I couldn’t have done it nicely).

          Something tells me that when you arrive in tax-free Texas, you’re doing to be one of those people endlessly bitching about the inadequate level of public services (likely roads and the park in front of your house) while enjoying your lifetime public pension and socialized medicine.

  3. You did not comment about the clause requiring the service member and spouse be residents of the SAME state to take advantage of this. This will considerably shrink the impact because a majority of spouses met/married the serviceman after his(her) joining up and being assigned to that spouse’s city. Many of these vets kept their original state of residence, which is now different than the state their new spouse comes from. I have several friends with drivers licenses from the 80s, but got married in another state because it was their first permanent duty station in the 90s. Of all 5 vets in my office I am the only one who shares a common state record with my spouse and will be effected by this Act.

    1. You’re right: I didn’t mention that specifically, although I did link to the explanation from the ROA that comes to that conclusion.

      That so few end up being entitled to this is a major fail on the part of the legislators.

    2. Your interpretation of this law is incorrect. One need not have had to been from the “same” state in order for this to work. That would indeed lessen the impact, however the law says that no spouse shall gain or lose domicile if they move to be with the military member.

      Under the MSRRA, the two options that the military spouse has are to:

      a..align with their spouses home state. If you have a bank account, property with both names on it, drivers license, vehicle registrations, voting, accountant, investments housed in a particular state, one may lay claim to that state. To infer that most spouses would “not” live with their spouse is an affront to our intelligence. MOST married couples are NOT from the same state and we assume that they would live together in whatever state they chose. We do not have that luxury and though the law is a bit ambiguous, I think “intent” will win out over other arguments.

      The other option for military spouses is to change to each new “host” state. For some couples, especialy if they are from a higher tax based state, this option may provide them with a slight benefit.

      Let us not pretend that the intent of this law was to allow some relief to a ‘few’ military spouses so that they could align their residency with their spouse. The law was meant to provide an ammendment to the SCRA to include ALL spouses…Standing in the room, looking right at the sponsors of this bill, I have absolutely no qualms about what their intent was and is.

      There are many, many, many opinions on this legislation. There are many who are chiming in now that it has passed. Where were these same people when it was going through this process for the last 3 years.

      I think that in a year…this will be a non-issue and military families can and will feel secure in the knowledge that they are able to move, live, and vote as a unit. Spouses are not gypsies, we have the right to a ‘home’ state and we have that now with MSRRA.

    1. The issue of Virginia taxes on military retirement pay may be off-topic, but my own father was offered this wonderful deal by the State, or the option of fighting it in the courts for years.

  4. As a spouse of an Active Duty Marine who (unfortunately) was staioned in VA for a time we could not wait to get out of the state quick enough because of your tax laws. This is just not about income tax this is also about property tax, voting rights, retention of what you had before being forced to move. If my husband had a vehicle in his name we paid no property taxes if it was in both our names or just in my name we paid taxes??? I am not sure how VA thinks that this is ok or fair or makes sense. It would be fine and resonable if my husband was paid what he would earn for his job in the civilian sector but he is not and that in most states military families less than E4 in rank actually quilify for WIC or food stamps prove this. The fact that I also worked in VA and was forced to pay VA State Income tax is an annoyance. Your argument basically saying well nothing is free is coverd by VA having a high sales tax and I paid sales tax on all of my consumables. If this law is revoked or changed to suit the WANTS of States like VA (those who cannot handle their budgets thus must try and grab all the $ that they can)who do not appreciate all of the sacrafices that our military service members make and the fact that they do not get paid what they are worth I hope they also make it so we have to vote in the state we “live” because imagine how many votes military spouses are worth and how many of them you just alienated because of your short sighted selfish money grabbing ideals. I personally will make sure that every military installation news paper in VA has a copy of this post if that happens, to be honest I think I might just send it in to them any way for those who are VA resisdents now and get to vote.

    Thanks again for supporting our military families during this time of war and great sacrafice. I hope you are proud and I hope that your extra tax $$$ keep you safe because I know that our military does.

  5. What is obvious to me with the discovery of my 3-week-old post is that few of the posters have bothered to read the links I included.

    If you have a problem with the interpretation of the effect of the law, take it up with the Reserve Officers Association, a link to which I provided.

    Not once did I say the law should not be enacted, which is what the posters seem to indicate. I only asked that the date of enactment be pushed back. And yes, I contacted my representatives and asked for this. It’s what citizens do when they see something that isn’t quite as it should be.

    Finally, it is true that Virginia will lose tax dollars because of this law. Stating a fact is not in any way saying anything about supporting or not supporting the military.

    1. I think that the VA benefits far more than it looses by having so many military members in its state. So I think that this is just evening it up. I do not have a problem with the interpretation of the law, granted this law is not perfect but it is a step in the right direction and in no way needs to be “reconsidered”. You also said that “Virginia receive additional federal funds for the impact of the lost revenue as well as the additional resources that will be required to track down and determine if the person claiming exemption is entitled to it? If not, this becomes another unfunded mandate placed on the Commonwealth” well do state that do not have several large military bases in them recieve extra federal funds for the fact they are not “given” guarunteed income earning resisdents to shop in their stores, rent their houses, pay sales tax???? I am guessing the answer is no? So why should VA get to double dip at the expense of military families? And yes this is about supporting military families because it is our lively hood, our income and our well being that you are saying should be compromised oh sorry reconsidered. If anything you should support the bill and lobby for it to be more wide reaching to cover ALL military spouses not lobby to repeal it.

      1. Are you serious? Double dipping at the expense of military families? That, along with your “repeal” statement, is quite a leap from anything I’ve said.

        Heck yeah, they need to reconsider the enactment date. VA stands to lose money, while other states stand to gain. It’s really that simple. VA needs time to figure out how to deal with this loss of revenue.

        1. Also in double dipping I am refering to the fact that VA taxes VA Military Members (whose home of record is VA) but live outside of VA income tax AND VA also collects from military personal who live in VA but are not VA residents via sales tax and also taxing the spouses income tax as if they are residents. Other States, FL, TX, NJ, DC, SC, IL, PA, KS and a WHOLE host of others do not charge resident military members who are stationed outside of their home of record state income tax. Some of them are not going to charge their spouses state income tax either once the get their residency switched to align with their AD spouses as long as they do not live in the state. This is how VA is double dipping in comparison to other states.

      2. Rachel, you get zero sympathy from me, as you don’t seem all that aware of the big picture. I can well remember my family’s handling of food stamps (that’s exactly what they were, back then) when my father was trying to get us by on an E4’s salary. But – like everyone else – he was a part of society, and was reasonably expected to pay taxes to help support the benefits of society. That you’re nannering on about VA’s enormous tax burden makes me think that you’ve really not taken the time to acquaint yourself with the concept and practice of state taxation, and aren’t aware that VA’s burdens are about as low as they get, in the US.

        1. I was not asking for your sympathy I was merely expressing my opinion that I think that VA as a state needs to do more to support military families especially considering that as a state the net gain of having so many large military installations within its borders. I do not understand why VA is not more supportive. Does not one see that perhaps if as a state there was more pro military ideas, that more military families (post service) would choose to stay or choose to return? There is alot in VA but for us the unfair (in comparison to many other states) tax and property tax laws in regards to the military and military families leaves a bad taste.

          Also if all members of society made the same sacrafices that military members and military families make for the society as a whole then yes then the treatment would be fair. But not all people contribute. I am not “nannering” the tax burden for military families in VA is larger than that of other states. For non military families they are probably comparable but not for military families. Are you really defending that you think it was ok that your father had to use food stamps to support the family when he was serving his country? If you are then I am quite shocked. If I chose to live in VA then fine I will pay what ever tax the state asks of me but the fact I was forced to live in VA by the federal govt I believe makes a difference. That is just my opinion.

  6. Author obviously has no clue what military service does to a spouse’s career, or for that matter anything about the military. The critiques of the law are trivial and irrelevant, which makes it seems that the author is merely trying to anger people in the military.

  7. Does this law apply if you lived with in one state with Military member since he was stationed in NJ and then moved to Andrews MD together and got married once in md. Are you able to apply this law since I came from Jersey?

  8. It is about time. The Military spouse is often caught paying 2 or 3 state taxes. As for Funding the State already gets 5,000 a year for each military child attending public schools. Which most of them misuse leaving military families with overcrowed schools and a poor education. Boo Who VA looses some taxes. We always say to support the troops but what about the families that hold them up, the ones that give them a reason to come home alive after a deployment.

  9. As a military spouse and a tax preparer for 2 different institutions, I am deeply offended by the statement that we are merely changing our state of legal residency to evade state income taxes. The process to change legal residency is extremely hard. People are not able to “just do it”.
    It is, also, the responsibility of the military member’s and spouse’s tax preparer to provide information how to take advantage of the MSRRA and if they are not eligible. We educate the people on the steps in changing residency and how difficult the process is. There are many people that are VA residents living in other places that take advantage of the MSRRA and pay their taxes to VA.
    The MSRRA is retroactive to just 2009 and, yes, the states needed to quickly decide how to implement the law. But most states implemented the law within the needed time frame.
    I find this article an insult to military spouses. We are not state income tax evaders.

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