I had planned on writing my second issue of the tax guide on filing status and credits, but since yesterday's post, I've gotten many questions at the tax center about the concept of Domicile and how it affects taxes. I'm sure there are others out there in the same boat, so here goes...
1. What is Domicile?
Domicile is your place of legal residence. It is established by actual presence and an intent to remain. What that means is that you must actually be present in the state you claim as domicile and intend to come back and live there. Military personnel do not lose their domicile by entering active duty.
2. Is it true that I can just pick a state with no income tax and make it my domicile for tax purposes?
NO! I can't emphasize this strongly enough. You cannot just claim to be a Florida or Texas resident and not pay state income taxes unless you've actually lived in those places. Doing so is tax fraud and more of a headache than it's worth.
3. Are your home of record and your domicile the same thing?
Not necessarily, for some taxpayers they are, for others (like me) they are not. Your domicile can change after you declare your home of record.
4. How does one change their domicile?
Domicile can be established and abandoned. For example, I am domiciled in Pennsylvania. That's determined based on the connections to the state. For me, I am registered to vote there, licensed to drive there, my car has PA plates and I am licensed to practice law there. But say I moved to Maryland and found it to be paradise. I bought a house, changed my car registration to MD, got a MD driver's license and became registered to vote in MD. Those steps could change my domicile to Maryland.
5. What is the Military Spouses Residency Relief Act ?
The MSRRA is an act of Congress that served to simplify the residency and domicile issues for military spouses. In essence it allows the spouses of military members to keep their state of residency and domicile when moving with their spouse to be with them as a consequence of active duty orders, so long as that state is the same state as the active duty member. That is, for your spouse to be covered under the provisions of MSRRA you must have the same state of residency.
6. Cool, I'm a Texas resident, can we just have my spouse claim Texas as well?
Sounds that simple, but no. Your spouse must have actually lived and established domicile (see above) in that state. If you are a Texas resident, met your spouse in California, married there, and your spouse has never actually lived in Texas, you are out of luck.
7. So what does MSRRA do for us?
I'll use Virginia as an example. If you and your spouse, both residents of Pennsylvania, move to VA because you were permanently assigned to Fort Lee, and your spouse gets a job in Virginia, he/she would not owe state income tax to VA, however, she would need to file a Pennsylvania return. Check with your state department of taxation for details applicable to your situation. Keep in mind, MSRRA applies to income earned from wages and employment only, not to rental or other income.