Identifying your domicile and how it can impact your wallet during tax season Published Feb. 14, 2014 By Capt. Carman A. Leone 319th Air Base Wing Legal Office GRAND FORKS AIR FORCE BASE, N.D. -- As Tax Day 2014 approaches, nearly all of us share the same goals: minimize the amount of taxes we pay and maximize our return within the confines of the law. Identifying your domicile can directly impact these goals. What is Domicile? Domicile is a term of art that has a very specific meaning. Different from "home of record," your domicile is the state in which you reside now or have resided in the past and the place where you intend to remain or return to. Many states use domicile synonymously with "state of residence." Your domicile is important for a variety of legal matters, such as, for example, creating a will, registering to vote, registering your vehicle, etc. Significantly, your domicile also dictates where you pay your state taxes. We all have a single domicile, but identifying it can be difficult at times. For civilians, a domicile is usually the place where a primary residence is maintained. Typically, most states will consider a person a domicile of the state after 183 days are spent in the state. The Military Exception: Servicemember Civil Relief Act (SCRA) As an active duty military member, however, you have special rules regarding identification of your domicile. Congress recognized that as military members, we often move from one state to another with little to no say in where we serve. Lawmakers recognized that it would be fundamentally unfair if we were forced to claim a domicile in every state we were ordered to live in after spending 183 days in that state. To relieve this burden, Congress promulgated the Servicemember Civil Relief Act (SCRA), which states "a person who is absent from a State in compliance with military or naval orders shall not, solely by reason of that absence--(1) be deemed to have lost a residence or domicile in that State, without regard to whether or not the person intends to return to that State; (2) be deemed to have acquired a residence or domicile in any other State; or (3) be deemed to have become a resident in or a resident of any other State." This means, for example, that if you are originally from New Jersey you will not automatically lose New Jersey as your domicile, nor will you acquire a North Dakota domicile simply for moving to North Dakota because of your PCS orders to Grand Forks AFB. If, however, you decide you want to declare North Dakota as your domicile after moving to the state, you may consider doing so by taking affirmative steps (discussed in detail below). There may be tax benefits to either retaining your current domicile or acquiring the domicile of the state to which you receive orders to serve. For example, an Airman who is originally domiciled in New Jersey may not want to change his domicile if he receives orders to serve at Grand Forks AFB. New Jersey's tax law does not tax the income of those military members who are serving in another state pursuant active duty orders if the member does not maintain a permanent home in New Jersey, the member maintains a permanent home outside of New Jersey, and the member does not spend more than 30 days in New Jersey during the taxable year. Most active duty servicemembers domiciled in New Jersey serving in another state will qualify for an exemption from state taxation of active duty military pay. Servicemembers domiciled in North Dakota, however, are taxed on all their income, regardless of the source and no matter which state or country in which they have orders to serve. Therefore, for tax purposes, most would prefer to be domiciled in New Jersey instead of North Dakota, if the option is available. Military Spousal Residency Relief Act (MSRRA) Until relatively recently, this domicile-retention benefit only extended to military members. In 2009, however, Congress amended SCRA with the Military Spouse Residency Relief Act (MSRRA), which extended this same benefit to civilian spouses of military members. After all, often where ever the servicemember moves, so will follow the family. Under MSRRA, a civilian spouse who moves away from her domicile so that she can live with her active duty spouse who receives orders to serve in another state will not lose her domicile when she moves. MSRRA also specifically provides that a civilian spouse will not be required to pay taxes in any location other than her domicile. In other words, your civilian spouse's domicile will not change if your spouse moves from one domicile to the state you are serving if the sole purpose for moving is to live with you. Further, the civilian spouse's income for services is exempt from the state's income tax if three conditions are met: (1) you, the active duty spouse, are stationed in that state, (2) neither the active duty member nor the civilian spouse are domiciled in that state, and (3) the only reason the civilian spouse is in that state is to live with you. Therefore, if, for example, the New-Jersey-domiciled Airman and his civilian spouse move to North Dakota pursuant active duty orders to serve at Grand Forks AFB, then under MSRRA, the spouse will not be forced to claim North Dakota as her new domicile if she does not so desire. Furthermore, the civilian spouse will not be required to pay North Dakota taxes on her income if: (1) the Airman is living in Grand Forks, ND only because of active duty orders to serve there, (2) neither the Airman nor the civilian spouse are domiciled in North Dakota, and (3) the only reason the civilian spouse is living in North Dakota is so the spouse can live with the Airman. It is worth noting here that some states have interpreted MSRRA to require that the servicemember and the spouse share the same domicile before moving to a new state to serve in accordance with military orders in order to take advantage of this benefit. To illustrate this point, suppose a single New Jersey Airman who is stationed at Grand Forks AFB meets a Minnesota civilian and marries her. If the newlywed couple then moves to California after receiving PCS orders to Beale AFB, CA, the New Jersey Airman will not be required to change his domicile to California under SCRA. His Minnesotan civilian spouse, however, will have to change her domicile to California after moving to the state because California interprets MSRRA to require that the military member and the nonmilitary spouse share the same domicile at the time they move to California. Thus, regardless of whether the Minnesotan wants to become a domiciliary of California, she will acquire a California domicile after establishing a home there. NOTE: North Dakota does NOT interpret MSRRA this way and does NOT require that both individuals be from the same domicile for the civilian spouse to qualify for benefits under the law. Changing your domicile Often, career Airmen who have been serving for over a decade will choose to become a domiciliary of the state that offers the most favorable tax benefit to the member. While SCRA guarantees protection from being required to change your domicile, it does not guarantee that your former state of domicile will not seek taxes from you if you choose to abandon that domicile for another. For example, suppose a born-and-raised North Dakotan joins the United States Air Force at age 25. Prior to joining the service, he worked as a mechanic in Bismarck, ND for seven years. For nearly a decade, he has paid North Dakota state taxes. His first duty station to which he received orders to serve is Joint Base McGuire-Dix in New Jersey. If the Airman chooses to change his domicile to New Jersey to take advantage of the favorable tax treatment of military compensation, he will have to take affirmative steps to prove his intent to change his domicile from North Dakota to New Jersey. Come tax season the year following the Airman's move to New Jersey, North Dakota may challenge the Airman and inquire why no taxes were filed with North Dakota. To help prove the change in domicile, the Airman may want to take affirmative steps that establish proof of his intention to change his domicile. In order to change your domicile, you must take three affirmative steps. First, you must abandon your current domicile. Second, you must physically move to a new state. Third, you must intend to permanently change your domicile to your new state of residence and remain there at the time you declare the new state as your domicile. To prove your intention to change your domicile you may consider taking the following steps: · Change your legal documents, like your will, to reflect your new domicile · Register and vote in your new state · Get a driver's license in your new domicile · Register your vehicle in your new state · Sell any real property in your old domicile These steps show intention of establishing a permanent residency in your new state and will often be necessary when proving your domicile come tax season. A quick note regarding the third step listed above: "you must intend to permanently change your domicile to your new state of residence and remain there at the time you declare the new state as your domicile." Should you change your mind about your intent to remain a domiciliary of your new state after moving to another state pursuant active duty orders, you may nonetheless consider that state your domicile as permitted under SCRA. For example, if the born-and-raised North Dakotan who is now on active duty orders to serve at Joint Base McGuire-Dix successfully changes his domicile from North Dakota to New Jersey by taking the steps outlined above, he may decide at any point in the future as an active duty Airman that he no longer intends to return to New Jersey. Notwithstanding his intent to never return to New Jersey, he may nonetheless claim New Jersey as his domicile as long as he is on active duty because SCRA protects the Airman's choice of domicile "without regard to whether or not the person intends to return to that State." Analyzing and applying these rules can get quite tricky. While applying MSRRA and SCRA may be frustrating at times, know that you do not have to wade through this legal murk alone. You may always contact the 319th Air Base Wing Legal Office, at 701-747-3606, for legal assistance in helping applying these laws to your particular situation.