Question about Military Pay and California and Hawaii

[GaryJay1]

Oh my gosh this is complicated. Please help me if you can on the below questions...

Background: So I'm doing my grandson's taxes. He entered the military in California. He was stationed in California for 10 months and got orders and his NEW Permanent Duty Station for the next 3 years is Hawaii. He and his wife have chosen to keep California as their Home of Record and State of Legal Residency (SLR). And your SLR is considered your Domicile as long as you are active duty.

I'm using the desktop version of Turbo Tax. So now for the questions:

1)  When Turbo Tax asks the question on the personal information page, it asks for State of Residency, do they mean the state where you currently live (Hawaii) rather than your military State of Legal Residency (Calif)?  So in my case, should I enter Hawaii as the State of Residency since he is now stationed there? OR, use California even though he moved to Hawaii and is stationed there.

2) In the State section, it asks number of days he was in California for any purpose (in his case 270). Then it takes me to a Nonresident Adjustments page to divide my income between CA and other places.  It tells me to enter the CA amount earned while residing in CA but then states I should only enter California active military as CA income while domiciled in CA (all year long in my grandson's case) and stationed in Calif (9 months only in grandson's case).    So is that saying that you don't report (and therefore pay any income taxes) on ANY military income for months stationed outside Calif. Meaning next year, if he is stationed in Hawaii and doesn't return to Calif at all, he would pay NO California income taxes on any of his Active Military earnings?

3) And last question. So if California doesn't consider the money California sourced income as it treats you as a non-resident when stationed in Hawaii as a Permanent Duty Station, what about Hawaii?  I found this on the Hawaii income tax site: Is all of my income exempt from Hawaii income taxes? Not necessarily. If you are a nonresident of Hawaii, you do not have to pay Hawaii income tax on the wages you earn for serving on active duty. The wages earned for serving on active duty are taxable in the state where you are a resident. 

SO.... California says you don't pay taxes on active military earnings when stationed outside of Calif. Hawaii says you don't pay Hawaii taxes unless you are a resident BUT you retain your residence as where you enlisted, right?  This seems to say that you would pay NO State Income Tax on active military duty earnings in EITHER Hawaii or California. Am I missing something?

[SteamTrain · Accepted solution]

@GaryJay1 

I'll give this a shot, but I don't know all the details of the CA tax forms.  There are a few CA experts out there, but they may not be seeing this yet (or will respond right as I'm typing this). I do know some CA details.

1) On the Personal Info page, you indicate their state of residence as CA, no matter where they are posted. Their SLR is used as their state of residence throughout his time in the military...unless he changes it legally on special forms (DD2058).   The mailing address can be HI....it's just the details when you edit their names tha sets it.Most service people do not change their SLR unless they get posted to a non-income-taxing state...but that also may depend on how long they plan to stay in service....though some never change it.

He will owe HI nothing, unless he takes an off-duty side-civilian job while stationed there....and then only as a non-resident.

2) Correct, CA does not tax their Military service people during the time they are posted out of the state of CA.    Thus, this year, the income while out-of CA is treated as-if he was a non-resident...even though he is.

And yes, next year none would be CA-taxed.  The software should ask where he was posted, and then the software would switch his CA tax return to a CA non-resident form.   

3)  Since they are both CA residents (up in #1), HI doesn't tax his military wages, nor her W-2 income if she works a W-2 job there...nor any of their interest, dividend income investment income.    What HI can tax while posted there is a) His W-2 civilian job income if he works off-duty (as I already indicated),,,,b) any self-employment income (Cash, 1099-NEC)  either of them may take on while in HI c) If they acquire a property in HI, and rent it out to others, the income from that would be HI-taxable.

IF his wife decides to work a W-2 job in HI, I'm not conversant as to whether CA taxes that income of hers or not.  Some states do so for the civilian spouse, even if posted out of their home state, others do not.

[TomD8 · Accepted solution]

@SteamTrain wrote: "IF his wife decides to work a W-2 job in HI, I'm not conversant as to whether CA taxes that income of hers or not."

CA tax law is that the non-military spouse of an active duty servicemember who is domiciled in CA but stationed outside CA due to PCS orders, is herself considered a non-resident of CA for tax purposes.   As such, she is subject to CA income tax only on CA-source income.  Income earned from work performed in HI is not CA-source income.

See "Non-military spouse" on page 6 of this CA tax reference:

https://www.ftb.ca.gov/forms/2023/2023-1032-publication.pdf

[SteamTrain]

@TomD8 

Thanks.....good to have someone jump in that knows more of the details.

I forgot about that 1032 publication...but jeeeeeze, when I looked at it just now, it sure is full of a lot of gobbledy-gook that I don't remember it having a number of years ago.....i,e, more difficult for a normal human being to be able to understand/follow.

[TomD8]

@SteamTrain --

Tax laws are written by politicians.