Personal tax tip #55

Filing facts for military personnel and their families

Military personnel who are legal residents of Maryland:

Military personnel who are legal residents of Maryland without overseas pay must file a resident return Form 502 and report all income from all sources, wherever earned. They must calculate the local portion of the tax regardless of whether you were stationed in Maryland or not. The location of your legal residence determines which county should be entered on Form 502. See Instructions 6 and 19 in the Maryland tax booklet. If you filed a joint federal income tax return, see Instruction 7.

Military personnel who are legal residents of Maryland with overseas pay the same as above; they may subtract up to $15,000 in military pay earned outside U.S. boundaries or possessions, depending upon total income. If you filed a joint federal income tax return, see Instruction 7 in the Maryland tax booklet.

Military personnel who are legal residents of another state:

1. With military income only: Not required to file a Maryland return.
   
   
2. With military income and other income earned outside Maryland: Not required to file a Maryland return.
   
   
3. With military and other income earned in Maryland, single or with an unemployed civilian spouse: Must file a nonresident return (Maryland Form 505), reporting total income and subtracting military pay; and Form 505NR, subtracting unearned and non-Maryland income, then computing the tax on Maryland earned income only. Deductions and exemptions must be adjusted. The state of Maryland does not tax the military pay, and does not use the military pay to increase the tax liability imposed on other income earned in Maryland.
   
   
4. With military income, and civilian spouse employed in Maryland, residing in Maryland less than six months: Military person and civilian spouse must file a joint nonresident return (Form 505), subtracting military pay; and Form 505NR, subtracting unearned and non-Maryland income, then computing the Maryland taxable net income. Deductions and exemptions must be adjusted. The state of Maryland does not tax the military pay, and does not use the military pay to increase the tax liability imposed on other income earned in Maryland by the military person or the civilian spouse.
   
   
5. With military income and civilian spouse with any income residing in Maryland more than six months: The civilian taxpayer becomes a statutory resident because of residency in Maryland more than six months of the taxable year. The couple may file a joint resident return using Form 502, or the civilian spouse may file a separate resident return. If the civilian spouse files a separate resident return, the military spouse is not required to file a Maryland return. If you are not certain which filing status to use, figure your tax both ways to determine the best status for you. If the civilian spouse files a separate resident return, see Instruction 8 in the resident tax booklet.
   
   When filing a separate return, your spouse may:
   
   
   • Claim the standard deduction;
   • Claim only the individual's federal itemized deductions from among those deductions claimed on the federal return that are attributable exclusively to that individual; and from those itemized deductions not otherwise claimed, claim a prorated amount of the itemized deductions using the Maryland income factor; OR
   • Claim a prorated amount of the itemized deductions claimed on the federal return.
   
   
   If the couple files a joint return, report your federal adjusted gross income on your Maryland return. Subtract military pay and the military taxpayer's portion of any investment income (interest, dividends, etc.) from the joint federal adjusted gross income. See Instruction 26 (c) through (j) in the resident booklet. The Maryland tax is then computed based on the balance of the total income. The standard deduction or itemized deductions and exemptions must be adjusted using the ratio of Maryland adjusted gross income to federal adjusted gross income. Military Worksheet A should be used to compute the amount of allowable deductions and exemptions.
   
   
6. With military income, other income in Maryland, and no non-Maryland income; and civilian spouse with any income residing in Maryland more than six months: The civilian taxpayer becomes a statutory resident because of residency in Maryland more than six months of the taxable year. The With military income, other income in Maryland, and no non-Maryland income; and civilian spouse with any income residing in Maryland more than six months: spouse remains a nonresident for purposes of Maryland taxation. The military taxpayer may file a separate nonresident return (Form 505) and the civilian spouse may file a separate resident return (Form 502). See Instruction 8 in the Maryland tax booklet.
   
   The civilian spouse may:
   
   
   • Claim the standard deduction;
   • Claim only the individual's federal itemized deductions from among those deductions claimed on the federal return that are attributable exclusively to that individual; and from those itemized deductions not otherwise claimed, claim a prorated amount of the itemized deductions using the Maryland income factor; OR
   • Claim a prorated amount of the itemized deductions claimed on the federal return.
   
   
   However, if the couple chooses to file a joint resident return (Form 502):
   
   
   • The military taxpayer's Maryland income is not subject to the local tax but is subject to the Special Nonresident tax. Enter the letter D in the part year/military box on the front of Form 502.
   • Standard or itemized deductions and exemptions must be adjusted, using a ratio of Maryland adjusted gross income to federal adjusted gross income.
   • The local tax must be adjusted using Military Worksheet B. In this situation, Military worksheets A and B should be used to compute the adjustment to the standard deduction or itemized deductions and exemptions and to compute the local tax for the civilian taxpayer.
   
   
   
7. With military income, other income in Maryland, and no non-Maryland income; and civilian spouse with any income residing in Maryland more than six months: The civilian taxpayer becomes a statutory resident because of residency in Maryland more than six months of the taxable year. The military spouse remains a nonresident for purposes of Maryland taxation. The military taxpayer may file a separate nonresident return (Form 505) and the civilian spouse may file a separate resident return (Form 502). See Instruction 8 in the Maryland tax booklet.
   
   The civilian spouse may:
   
   
   • Claim the standard deduction;
   • Claim only the individual's federal itemized deductions from among those deductions claimed on the federal return that are attributable exclusively to that individual; and from those itemized deductions not otherwise claimed, claim a prorated amount of the itemized deductions using the Maryland income factor; OR
   • Claim a prorated amount of the itemized deductions claimed on the federal return.
   
   
   However, if the couple chooses to file a joint resident return (Form 502):
   
   
   • The military taxpayer's Maryland income is not subject to the local tax but is subject to the Special Nonresident Tax. Enter the letter D in the part year/military box on the front of Form 502.
   • Standard or itemized deductions and exemptions must be adjusted.
   • They must attach to the Form 502 a pro forma Form 505 and Form 505NR. See Administrative Release 1.
   
   
   
8. Both spouses in the military and not domiciled in Maryland and one or both have Maryland Income: Must file a joint nonresident return. Exemptions and the standard deductions or itemized deductions must be adjusted.

Helpful reminders

Maryland's graduated personal income tax rates start at 2 percent on the first $1,000 of taxable income and increase up to a maximum of 6.25 percent on incomes exceeding $1,000,000.

If you have a federal adjusted gross income of up to $100,000 (up to $150,000 if filing jointly) you are entitled to a $3,200 exemption on the Maryland return for each exemption you are qualified to claim on the federal return. For taxpayers with higher incomes, the exemption amount is limited.

Military personnel can often avoid owing additional Maryland and local income tax by contacting their payroll office to make sure enough state and local income tax is being withheld from their pay.

Resident military taxpayers may be eligible for an overseas pay exclusion of up to $15,000.

If you or the spouse of military retiree receives military retirement income, you will be able to subtract up to $5,000 of your military retirement income from your federal adjusted gross income before determining your Maryland tax for tax year 2008. To qualify, you must have been a member of an active or reserve component of the U.S. armed forces, a member of he Maryland National Guard, or you must have retired after July 1, 1991 from active duty with the commissioned corps of the Public Health Service, the National Oceanic and Atmospheric Administration, or the Coast and Geodetic Survey. To claim the benefit, complete Form 502 and follow the instructions included in the resident tax booklet for line 14. Be sure to indicate code letter u on line 14.

Military personnel should be aware that there might be tax credits granted either by Maryland or another state. See Maryland Form 502CR and instructions. Read the instructions provided by the state of legal residence for any possible credits allowed by that state.