On Nov. 11, 2009, President Obama signed S. 475, the Military Spouses Residency Relief Act (P.L. 111-97) (the MSRRA), into law. The MSRRA amended the Service Members Civil Relief Act (P.L. 108-189), retroactively to the beginning of the 2009 tax year. (Residence and domicile have the same definition in this discussion.)
“A spouse of an service member shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the service member in compliance with the service member military orders if the residence or domicile, as the case may be, is the same for the service member and the spouse.”
It is important to note that if you employ a service member, his or her wages are subject to state income taxes. This law applies only to non-military spouses.
Most states now have a form that eligible spouses submit to employers to take advantage of exemption from state income taxes under this bill. As long as an employer is provided with a completed, signed form and retains the required supporting documentation in the file, the employer is authorized to not withhold state income taxes from the military spouse’s wages. Beyond a request to report suspected inaccurate or fraudulent forms to the state, employers are not required to audit or verify eligibility.
Employers are cautioned against offering advice or assistance with the determination of whether or not circumstances qualify a given employee for the state income tax exclusion under MSRRA. The best policy is to recommend employees retain a CPA for guidance in this area.
I also advise employers to obtain a new form and new documentation annually. To be eligible, the spouse must be in the state pursuant to spouse service member orders. If the service member is permanently reassigned (vs. a temporary duty assignment) and the spouse elects to stay behind he or she now loses the protection of this bill. Additionally, military ID cards do have expiration dates and income will cease to be exempt from state income tax upon the entry of a divorce decree. An employee may not think about reinitiating state withholdings once he or she is no longer eligible for exemption.
If a military spouse employee is a resident of a state that taxes income of military residents who are stationed in other states he or she may need to remit estimated income tax payments to that state. In most cases, employers are NOT required to withhold and remit state taxes to a state other than that in which services are performed.
Below are the links to the forms for DE and our neighbors which are current as of the date of this blog. This discussion is not intended to provide comprehensive information. These requirements may still be in development by the state revenue divisions since the law is fairly new and, as usual, there are a number of not so cut and dry situations which the federal law does not address.
For example: What if you employ a military spouse who is stationed in a neighboring state? What if the spouse and member physically reside in a state other than the state where the service member is stationed? The answers vary by state or are absent.
Additionally, I have noticed that several forms contradict themselves. The federal law (MRRSA) is applicable if the legal residence is the same for the service member and the spouse. Several state forms ask in one area that the employee simply be a legal resident of another state but in another area that the employee “meet all the requirements” of MRRSA. Since states could elect to be more generous with the exclusion than the federal law mandates, errors are sure to abound thanks to the poorly thought-out wording on these forms.
Again, I recommend placing the responsibility for interpreting the state laws and affirming eligibility100% on the employee. He or she is bearing this burden of proof by supplying the employer with the completed, signed form. Strictly adhere to all the instructions for employers on the forms and as provided in other state publications, if any.
DE: W- 4DE, Annual Withholding Tax Exemption Certification for Military Spouse
Note that DE allows exclusion if service member is stationed in either: DE, MD, NJ, or PA.
MD: MW507, Employee’s Maryland Withholding Exemption Certificate
PA: REV-419 EX Employee’s Nonwithholding Application Certificate
NJ: NJ-165, Employee’s Certificate of Non-Residence in New Jersey
VA: VA-4, Personal Exemption Worksheet