How did the Veterans Benefits and Transition Act change Virginia tax residency elections for military spouses beginning in 2018?

Plain-English summary

Federal legislation first effective for 2018 let a qualifying military spouse elect the service member's state residence even when the spouses had different prior domiciles.

The election expanded spouse protection but did not exempt every type of Virginia income.

Scope of the election

The election could be made annually beginning with 2018 for any taxable year of the marriage. It did not revise taxes imposed or paid for 2017 or earlier.

Personal-service compensation, including wages, was exempt when the spouse qualified. Self-employment income could qualify when predominantly derived from the spouse's services. Other Virginia-source income, such as rent from Virginia property, generally remained taxable.

Filing instructions

Eligible spouses could file Form 763-S for withheld-tax refunds, amend a filed 2018 return, and submit revised Form VA-4 to an employer for withholding exemption.

What this means for you

• Make and document the election for the specific tax year.
• Separate service income from other Virginia-source income.
• Do not apply the 2018 change retroactively to 2017 or earlier.
• Use the correct refund, amended-return, and withholding forms.

Citations and references

• Veterans Benefits and Transition Act of 2018
• Servicemembers Civil Relief Act
• Virginia Tax Bulletin 10-1 — prior-law background

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-11

Original ruling text

TAX BULLETIN 19-2

Virginia Department of Taxation

February 25, 2019

IMPORTANT INFORMATION REGARDING SPOUSES OF UNITED STATES MILITARY SERVICEMEMBERS

THE EFFECT OF THE VETERANS BENEFITS AND TRANSITION ACT OF 2018 ON INDIVIDUAL VIRGINIA INCOME TAX RETURNS

On December 31, 2018, Congress enacted the Veterans Benefits and Transition Act of 2018. This federal legislation amends the Servicemember Civil Relief Act (“SCRA”) to provide that the spouse of a servicemember may elect to use the same residence for state tax purposes as that of the servicemember. This tax bulletin summarizes this recent change and explains its effect on spouses of servicemembers for Virginia income tax purposes.

As previously explained in Tax Bulletin 10-1 , a spouse of a servicemember does not lose or acquire state residency or domicile for state tax purposes solely due to their presence in a particular state in compliance with military orders. However, under prior law, this protection was afforded only in cases where the domicile was the same for both spouses. In order to claim residency or domicile in another state, the spouse was required to have (i) resided in the other state with the intent to make a permanent home there, and (ii) not abandoned that domicile when moving to reside with the servicemember or for any other reason.

The Veterans Benefits and Transition Act allows qualifying spouses to elect the same residency as the servicemember for state tax purposes, even if the spouse has a different residency or domicile from that of the servicemember. This election can be made annually beginning with Taxable Year 2018 for any taxable year of the marriage, regardless of the date on which the marriage of the spouse and the servicemember occurred. This election does not affect taxes imposed or paid for 2017 and earlier.

All other principles set forth in Tax Bulletin 10-1 continue to apply to a qualifying spouse who makes an election under the Veterans Benefits and Transition Act. As a result, such spouse is exempt from Virginia income tax only on income for services performed by the spouse, including wages received as an employee. Income from self-employment is exempt from Virginia income tax if the predominant source of the business’s income is from the spouse’s performance of services. However, such spouse generally remains subject to Virginia income tax on all other income received from Virginia sources, including rental income from property located in Virginia.

Instructions for Taxpayers

Taxpayers eligible to make this election may file Form 763-S in order to receive a refund of any income taxes withheld. Qualifying taxpayers who have already filed a 2018 Virginia income tax return may make this election by filing an amended return.

A spouse whose wages are exempt from Virginia income tax under the SCRA may claim an exemption from Virginia withholding on Form VA-4, Personal Exemption Worksheet, which can be found on the Department’s website at https://www.tax.virginia.gov . Spouses wishing to claim this exemption from income tax may file a revised Form VA-4 with their employer.

If you have additional questions, please visit https://www.tax.virginia.gov , or contact the Department at 804.367.8031.