The new Military Spouse’s Residency Relief Act may raise questions for many employers about the tax treatment of wages for the spouses of active duty military personnel. The MSRRA could have a particularly notable impact in military heavy states like Virginia.
In short, the MSRRA exempts from state income tax the wages of the spouses of military personnel who move into a state to be with their service member spouse, even if that state otherwise would impose an income tax on the employee. The wages the employee earns will be exempt from state withholding. Additionally, even if the military spouse is outside the United States, the employee’s earnings are exempt from state withholding so long as the service member’s absence is in compliance with military orders.
The Act, as we understand it, is effective for any state or local income tax return beginning with a tax year that covers November 11, 2009.
(To ensure compliance with IRS requirements, readers are advised that any tax advice contained in this overview of the MSRRA was not intended to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or applicable laws, or promoting, marketing or recommending to another party any matter addressed herein.)