In 1940, the United States Congress enacted the Soldiers' and Sailors' Civil Relief Act. Among other things, the Act prohibited states from taxing the military compensation of servicemembers whose domicile was in another state. The law provided that residence and domicile do not change for tax purposes because of a servicemember's posting to another jurisdiction. Any member of the uniformed services serving on active duty was covered under the Act. This included reserve component personnel called to active duty, Coast Guard personnel, as well as officers of the Public Health Service and the National Oceanic and Atmospheric Administration.

In order to update and expand the Soldiers' and Sailors' Civil Relief Act of 1940, Congress, on December 19, 2003, enacted the Servicemembers Civil Relief Act (P.L. 108-189) which completely rewrote the old Act. The Act modifies the old law by making it gender neutral, assuring it encompasses branches of the military that did not exist in 1940, and providing technical updates. The Act includes a new provision which provides that a tax jurisdiction may not use the military compensation of a nonresident servicemember to increase the tax liability imposed on other income earned by the nonresident servicemember or spouse subject to tax by the jurisdiction. P.L. 108-189, § 511(d). The Act applies to any open cases under appeal or dispute as of the date of its enactment. Since Massachusetts does not tax income at a graduated rate, the only effect the Act has on Massachusetts taxes is that it requires a modification to the calculation of eligibility for "no tax status" and the "limited income credit" under General Laws chapter 62, section 5(a).

If a taxpayer's Massachusetts adjusted gross income is $8,000 or less if single, $12,700 or less plus $1,000 per dependent if head of household, or $14,200 or less plus $1,000 per dependent if married filing a joint return, he or she qualifies for "no tax status" and is not required to pay any Massachusetts income taxes. G.L. c. 62, § 5(a); See also, Form 1 Instructions and Form 1 NR/PY Schedule NTS-L-NR/PY Instructions. Taxpayers who do not qualify for "no tax status" may qualify for the "limited income credit" if their adjusted gross income does not exceed certain thresholds. Id. The credit is an alternative tax calculation that can result in a significant tax reduction for taxpayers whose income is close to the no tax status threshold.

Currently, in calculating whether a person who is a nonresident for all or part of the taxable year is entitled to "no tax status" or the "limited income credit," Massachusetts adjusted gross income is determined as if he or she were a resident of the Commonwealth throughout the entire taxable year. G.L. c. 62, § 5(a)(2)(B). Thus, in the case of a nonresident servicemember, military compensation is included in the adjusted gross income for purposes of calculating whether the "no tax status" threshold has been exceeded. As a result, the federal Act is violated. For example, the Act is violated in the case of a nonresident married couple in which the nonmilitary spouse earned less than $14,200 but inclusion of the military income causes the couple to exceed the no tax status threshold where the tax rate is zero and instead owe tax at the 5.3% rate.

Therefore, to avoid the overpayment of tax and violation of the federal Act, nonresident taxpayers that receive military compensation and will file Massachusetts Form 1 NR/PY for tax year 2003 and thereafter, should not include such military compensation when determining whether they qualify for "no tax status" or the "limited income credit." Specifically, a taxpayer filing Form 1 NR/PY should not include any non-Massachusetts source military compensation received by them or their spouse during the taxable year on line 7 of Schedule NTS-L-NR/PY. Taxpayers may include a brief statement on line 7 informing the Department that non-Massachusetts military compensation has been excluded from the amount reported.

The effective date of the federal Act was December 19, 2003. P.L. 108-189, § 3. Therefore, the Act applies to any tax year for which the statute of limitations for abatement was open on or after that date. Accordingly, a claim for refund of tax paid may be made for any prior tax year open under the statute of limitations because nonresident military pay was used in the calculation of the "no tax status" or limited income credit.

In general, a taxpayer may file a claim for an abatement within three years from the last day for filing the return for such tax, determined without regard to any extension, within 2 years from the date the tax was assessed or deemed assessed, or within 1 year from the date the tax was paid, whichever is later. G.L. c. 62C, § 37. Therefore, for most eligible taxpayers, a claim for a refund relating to a tax year as distant as calendar year 2000 could still be filed by April 15, 2004. If a taxpayer has already filed his 2003 return, or wishes to make a claim for a refund for a prior year for which he has previously filed a return, he must file Form CA-6, Application for Abatement/Amended Return for such taxable year. A Form CA-6 should be filed together with a copy of the taxpayer's income tax return (if required) filed in his state of domicile for each tax year at issue.

 

/s/Alan LeBovidge
Alan LeBovidge,
Commissioner of Revenue

 

AL:LAM:wm

April 1, 2004

TIR 04-6