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Military makes state tax MIA
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March 16, 1999: 10:12 a.m. ET
Service members can avoid state income taxes by choosing residency carefully
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NEW YORK (CNNfn) - You've heard about the GI Bill, the housing benefits and the tough-to-beat retirement package that members of the military enjoy.
But if you're looking for one more reason to enlist, consider the extra income you could save by keeping the state tax collector at bay.
"Generally, when people join the military they choose (to establish residency in) states with no state income taxes," said Robert Knight, co-owner of Pfuhl & Knight Accountancy Corp. in El Cajon, Calif.
A bigger cut
It may sound subversive, but it's perfectly legal.
Because military families are uprooted so often, they are entitled to choose one state as their "home of record" for tax purposes, while they move from base to base across the country.
Not surprisingly, many choose one of the more tax favorable states as their place to call "home." Among them: Texas, Alaska and Florida - none of which collect personal income taxes from residents.
If you choose Texas as your home of record, therefore, but get stationed in California (which has a 9.3 percent income tax burden), you'd be exempt from state taxes. (The federal government, of course, still wants its fair share.)
Though military recruiting outposts say they don't usually tout state tax exemptions as an incentive to join, most readily admit it's common for service members to go their whole active duty career without ever paying state taxes.
If you retire, however, you'll have to take up residency full-time in one of these states (like the rest of us) to maintain your tax-free status.
"Having retired, I was shocked by the tax load I had all of a sudden," said Col. Robert Maginnis, a military retiree and spokesman for the Family Research Council. "So much of my income was protected in the military and now in the civilian world everyone wants a piece of it. It's a rude awakening."
He added Alaska, with its absence of state income tax, and the annual oil dividend checks it doles out to residents, is perhaps the most lucrative state in the nation to establish residency.
The oil dividend checks vary each year, but the Alaska Department of Revenue last year handed out roughly $1,500 per resident (this applies to non-military residents as well).
"When you go into military communities you'll see a disproportionate number of Texas and Alaska plated cars," Maginnis said. "You see them all over the Pentagon these days."
Capital gains
Military tax benefits, however, extend beyond personal income taxes.
As an active duty service member, you can also change your "home of record" to avoid new tax laws that work against you -- if you think it's worth the hassle, that is.
Tennessee and Connecticut, for example, have begun collecting their own capital gains taxes, on top of the federal tax. A fair number of military personnel have changed their address as a result, particularly the higher ranking officers that have large investments in equity markets.
Moreover, states including Michigan and Illinois cut military service members a break, exempting them from state income tax. You will be required, however, to pay taxes on capital gains and interest earned.
Roots
So why doesn't everyone in the armed forces establish residency in a tax free state?
"Some people have an allegiance to their home state or still own property there," Maginnis said. "They have family there or may want to vote there."
Also, it's not that easy to do.
State governments aren't willing to be taken advantage of, nor are they eager to be viewed as tax shelters. They, therefore, require military personnel who claim to be residents of the state to prove that they are.
The criteria differs by state, by generally it requires you to either own property in the state, vote in state or local elections, register your car there or hold a bank account.
Spousal pitfalls
Be forewarned, also, that most states do not cut the same breaks for your non-military spouse.
If he or she holds a job in the state where you are based, that income is subject to state taxes. Likewise, if you hold a civilian job during your off-duty hours, the income you receive is usually taxed as well.
"Sometimes my military clients misunderstand that if the spouse gets a part-time job wherever they are living that that income is taxed as if they were a resident," Knight said. "So on your returns, you'll have a situation where one spouse is a non-resident and the other is a resident."
Take it if you can get it
You'd be hard pressed to find a military service member who enlisted for the sole purpose of state tax avoidance. But those who take advantage of it say the additional income each year can add up fast, and even up your standard of living in the long-run.
As an example, if you earn $30,000 a year ($2,500 a month) at a military base in California, but establish your home of record in Texas, you'd save some $2,700 a year in taxes. That adds up to about $200 extra in your monthly paycheck.
Salaries vary widely in the military, depending on your rank and years in service, but here are a few breakdowns of the basic pay scale:
-The most junior ranking sergeant in the military, with six year of service, earns $1,614 a month, while a 24-year sergeant major takes home $3,507 per month.
-Second lieutenants, the most junior officer, earn $1,838, and a lieutenant commander with 10 years in the service makes $3,855.
-In the upper echelon, a full colonel with 20 years in the military earns $5,834, and a four-star general with 26 years gets $10,800 each month.
Keeping that money out of the hands of state tax collectors, no matter how small their percentage might be, can help cushion the blow of monthly bills, Maginnis said.
"Why should you give up 5 percent of your salary when you don't have to?" he said. "You'd be a fool not to declare residency in Texas or a state that doesn't require you to pay income tax." 
--by staff writer Shelly K. Schwartz
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