Military Spouse State Taxes Connecticut Expemption

[LstDtchMan]

Hello All,

While doing our taxes for 2020 and comparing a joint return vs a married but filing separate return it dawned on me that I was clueless as to how a joint return would be done at a state level given our circumstances. I think I’ve settled on doing a separate return due to student loan issues but I am curious as to if my wife has been filing her state taxes correctly and if I should/could file mine similarly. Here are the details:

• My spouse is a service member, I am not, but we should be covered by the MSRAA (Military Spouses Residency Relief Act 2019) and SCRA (Servicemembers’ Civil Relief Act).
• My spouse and I met in Connecticut and she became a service member while we were both residents of CT. We intend to return to CT at some point in the future, likely when she leaves the service.
• We have moved to two different states (AZ and MD) due to permanent change of station orders and are currently living in a rental home in MD.
• She has maintained her "Home of Record" and "Domicile" as CT throughout and has had income tax withheld in CT only since leaving CT.
• She currently has an Arizona license and car registration; I currently have a Maryland license and car registration.
• We filed for 2019 as married but filing separately for both federal and state. I filed my state taxes in Maryland as a resident, she filed taxes with CT as non-resident.
• Per guidance here Income Tax Information-Military (ct.gov) , she has filed her taxes essentially as “resident able to file as nonresident” to receive a full state tax refund each year from CT and she has not paid any other states any income tax. More info on the regulations here: Is my military income taxable to Connecticut? – Support (taxslayer.com)

So, has she been doing this correctly and does she really have no tax liability in CT or any other states while living outside of CT on military orders?

If so, per the MRSAA should/could I also have CT as my state of residence for tax purposes while living in MD and how would that effect my taxes?

[MarilynG1]

If you wife's HOR is Connecticut, as a Military Spouse you can elect CT as your Resident state also. 

Click this link for more info on Military Spouses. 

Since you file separate state returns, and your wife is filing correctly as a 'Non-Resident' to CT, if you also file as a CT Non-Resident, you will still need to file a Resident return to Maryland, as your income is still reported there. 

If you file as a CT Resident, you would need to file a Non-Resident return to MD, as your income was earned there. Sounds like you may be better off the way you've been doing it! 

[LstDtchMan]

Thanks for looking at that for me. 

I am inclined to get our state taxes on the same page, both in Connecticut, but I do have some concerns. 

Would my income fall under the same guidelines here (Resident Working in Another State (ct.gov)) if I were to declare CT as my residency under the MSRRA? Meaning I would pay whatever CT incomes taxes first and then whatever Maryland taxes I would owe on that income, minus a credit for taxes paid to CT? Or would my income only be taxable in CT due to being covered by the MSRRA? It seems like I would only have an obligation to CT as this Maryland publication states (Administrative Release No (marylandtaxes.gov):(

Under the Act, a military servicemember’s
civilian spouse who is domiciled in a state other
than Maryland and who is in this State solely to be
with the servicemember serving in compliance with
military orders is a nonresident of the State
regardless of how long the civilian spouse has
resided in the State, and:

a. Is not subject to Maryland taxation on
income for services performed within this State
(e.g. wages, salaries or tips) — the civilian spouse
must timely, and annually, submit Maryland Form
MW507 and MW507M3
to the employer asserting
and attesting to the civilian spouse’s exempt status
from withholding requirement; and

Also, is it correct that my wife's military income is non-taxed by either Maryland or Connecticut? As CT is considered her state of legal residence but she is working in Maryland for the entire year and files a non-resident tax return with CT which refunds her withheld CT taxes. It seems as though she is correct in that she meets the requirements to have no income tax withheld per CT military personnel guidance:

Income Tax Information-Military (ct.gov)

1. You did not maintain a permanent place of abode in Connecticut;
2. You maintained a permanent place of abode outside Connecticut; and
3. You spent 30 days or less in Connecticut.

If you meet all three conditions, you are considered a nonresident of Connecticut for the taxable year. You do not have to file a Connecticut income tax return unless you had Connecticut tax withheld or you had any income from Connecticut sources.

And also meets the Maryland requirement to have no taxes withheld per this guidance.

"Military personnel who are legal residents of another state: With military income only Are not required to file a Maryland return" Microsoft Word - tip55.doc (marylandtaxes.gov).

Thank you!

[ToddL99]

If you establish your residency in CT (as permitted by MSRRA), then your MD income would only be subject to CT tax (as stated in  Administrative Release No (marylandtaxes.gov)).

Your military spouse would not be subject to MD tax or CT tax (as stated in Income Tax Information-Military (ct.gov))

Consider the following factors in demonstrating ("proving") your actual state of residence: 

What makes you a legal resident of a state (or country)?  

Generally, you're a resident of a state (or country) if you intend to either stay there permanently, or return there after a temporary absence. It's where home is – where you come back to after being away on vacation, business trip, overseas or out-of-state employment, or school. Many factors are considered, not the least of which are where you are registered to vote, own homestead property and are licensed to drive.