Military Tax Issues in Virginia

Virginia hosts one of the largest military populations in the country. From the Pentagon and Fort Belvoir in Northern Virginia to Naval Station Norfolk and Joint Base Langley-Eustis in Hampton Roads, tens of thousands of active-duty service members, reservists, and military families call Virginia home, at least temporarily.

Military tax obligations are more complex than civilian taxes. The Servicemembers Civil Relief Act (SCRA), multi-state residency rules, combat zone exclusions, Permanent Change of Station (PCS) moves, and military spouse employment provisions create a web of tax rules that most tax professionals rarely encounter.

Bill Fritton, EA, MBA at Back Tax Expert Inc. in Vienna, Virginia understands these military-specific tax issues and resolves them for service members stationed throughout Virginia.

Virginia's Military Footprint

Virginia is home to major military installations across the state:

Northern Virginia

The Pentagon (Arlington): Department of Defense headquarters
Fort Belvoir (Fairfax County): Army installation, home to multiple agencies
Marine Corps Base Quantico (Prince William/Stafford): Marine Corps, FBI Academy
Joint Base Myer-Henderson Hall (Arlington): Army
Fort Walker (formerly Fort A.P. Hill): Army training center

Hampton Roads

Naval Station Norfolk: Largest naval base in the world
Joint Base Langley-Eustis: Air Force and Army
Naval Air Station Oceana (Virginia Beach): Navy fighter wing
Portsmouth Naval Shipyard
Newport News Shipbuilding
Dam Neck (Virginia Beach): Navy special warfare

Other Virginia Installations

Fort Barfoot (formerly Fort Pickett): Army National Guard maneuver training center
Wallops Island: NASA/Navy facility
Dahlgren Naval Surface Warfare Center

Each installation brings thousands of service members and their families into Virginia's tax jurisdiction, creating the filing obligations and potential tax problems covered in this guide.

The Servicemembers Civil Relief Act (SCRA) and Taxes

The SCRA is the most important federal law affecting military tax obligations. It provides several protections relevant to state income taxes.

Legal Domicile Protection

Under the SCRA, a service member's state of legal domicile does not change simply because they are stationed in a different state under military orders. This means:

A service member domiciled in Texas (no state income tax) who is stationed at the Pentagon does not become a Virginia taxpayer on their military income
A service member domiciled in Florida who is stationed at Naval Station Norfolk does not owe Virginia income tax on military pay
The domicile state is generally the state where the member enlisted or was commissioned, unless they take affirmative steps to change it

Virginia income earned while stationed here is exempt from Virginia tax for non-resident service members. This includes base pay, special pay, bonuses, and allowances that are part of military compensation.

What SCRA Does NOT Protect

The SCRA domicile protection applies to military income. It does not protect:

Non-military income earned in Virginia: If a service member stationed in Virginia also works a civilian job, starts a business, or earns rental income from Virginia property, that income may be taxable by Virginia.
Investment income with a Virginia connection: Depending on the type and source, some investment income may be Virginia-taxable.
Military spouse income (with exceptions): See the military spouse section below.

Common SCRA Tax Problems

Problem 1: Incorrect Virginia withholding. A service member stationed in Virginia whose legal domicile is another state should not have Virginia income tax withheld from military pay. But payroll offices make errors. If Virginia taxes were withheld incorrectly, the member needs to file a Virginia nonresident return to get the refund, or correct the withholding going forward.

Problem 2: Failure to claim SCRA protection. Some service members do not know about SCRA protections and pay Virginia income tax for years when they do not owe it. These overpayments can be recovered through amended returns, subject to the statute of limitations for refund claims (generally three years).

Problem 3: Virginia claims the member changed domicile. If a service member registers to vote in Virginia, obtains a Virginia driver's license, or takes other actions that suggest intent to change domicile, Virginia may argue that the member voluntarily became a Virginia resident. The analysis is fact-specific and often requires professional help.

Military Spouse Residency Relief Act (MSRRA)

The Military Spouses Residency Relief Act, expanded by the Veterans Benefits and Transition Act of 2018, extends SCRA-like protections to military spouses.

How MSRRA Works

A military spouse who moves to Virginia to be with their service member spouse can elect to keep the legal domicile of the service member's domicile state (or, under the 2018 amendment, the spouse's own prior domicile state) for income tax purposes.

Example: An Army spouse is domiciled in Tennessee (no state income tax). Their service member spouse is stationed at Fort Belvoir, Virginia. The spouse gets a job in Virginia. Under MSRRA, the spouse can elect to be treated as a Tennessee resident for income tax purposes, meaning no Virginia income tax on the Virginia wages.

MSRRA Requirements

To qualify for MSRRA protection:

The spouse must be present in Virginia solely to be with the service member
The service member must be in Virginia under military orders
The spouse must claim the domicile of the service member or their own prior domicile
The spouse must file the appropriate documentation with their employer and Virginia

Common MSRRA Problems

Problem 1: Virginia employer withholds incorrectly. Many Virginia employers are unfamiliar with MSRRA and withhold Virginia state taxes from military spouse wages. The spouse must file a Virginia nonresident return to recover the withholding, or submit Form VA-4 with the appropriate exemption.

Problem 2: Spouse changes domicile unintentionally. If a military spouse obtains a Virginia driver's license, registers to vote in Virginia, or takes other domicile-establishing actions, Virginia may argue the MSRRA protection was forfeited.

Problem 3: Mixed income sources. If a military spouse has both employment income (MSRRA-protected) and Virginia-source income like rental property or a Virginia business, the non-employment income may still be Virginia-taxable.

Multi-State Filing for Military Families

Military families routinely face multi-state filing situations that civilian families never encounter.

PCS (Permanent Change of Station) Moves

When a service member PCSes to Virginia from another state (or from Virginia to another state), the move creates potential tax issues:

Part-year residency: If the service member is domiciled in Virginia, a mid-year PCS means filing part-year returns in both the departure and arrival states.
Moving expense treatment: The Tax Cuts and Jobs Act eliminated the moving expense deduction for most taxpayers, but military members on active-duty PCS orders can still deduct qualifying moving expenses.
Dislocation Allowance (DLA) and other PCS payments: These are generally not taxable but must be tracked to ensure they are not accidentally included in income.
Housing issues: Selling a home in the departure state while buying or renting in Virginia creates potential capital gains implications, particularly if the member does not meet the two-year use requirement for the primary residence exclusion.

Deployed Service Members

Service members deployed to combat zones receive significant tax benefits:

Combat Zone Tax Exclusion (CZTE): Military pay received while serving in a designated combat zone is excluded from federal income tax. For enlisted members, all pay is excluded. For officers, exclusion is capped at the highest enlisted pay rate plus hostile fire/imminent danger pay.
Extended filing deadlines: Service members in combat zones get automatic extensions to file returns and pay taxes. The extension period includes the time in the combat zone plus 180 days after departure.
Virginia treatment: Virginia generally follows the federal combat zone exclusion rules.
Forgotten deadlines: After deployment, some service members fail to file the returns that were extended, creating delinquencies that may not surface for years.

Guard and Reserve Complications

National Guard and Reserve members face unique multi-state issues:

Drill weekends in a different state: If a Guard/Reserve member lives in Virginia but drills at a facility in another state, the drill pay may create a filing obligation in that state.
Activation and deployment: When activated, Guard/Reserve members receive SCRA protections, but the activation/deactivation dates create complex part-year calculations.
Virginia National Guard: Members of the Virginia Army or Air National Guard who are Virginia residents file Virginia returns on all income. But members of other states' Guard units who happen to live in Virginia may have different obligations.

Common Military Tax Problems in Virginia

Problem 1: Unfiled Returns After Deployment or PCS

The most common military tax problem is unfiled returns. Military life creates constant disruption: deployments, PCS moves, training exercises, temporary duty assignments. Tax returns get postponed, then forgotten.

After several years of unfiled returns, the IRS and/or Virginia may file Substitute for Return (SFR) assessments. These assessments:

Do not include combat zone exclusions
Do not include military-specific deductions
Do not account for SCRA domicile protections
Do not include the standard deduction, personal exemptions, or credits

The result is an inflated tax bill based on W-2 and 1099 income without any adjustments. Filing the actual returns, even years later, typically reduces or eliminates the assessed balance.

Bill Fritton helps service members file delinquent returns that properly account for military-specific exclusions, deductions, and protections.

Problem 2: Multi-State Confusion

Service members who have PCSed through multiple states may have unfiled returns in several jurisdictions. Each state's filing requirement depends on:

Whether the member was domiciled in that state
Whether non-military income was earned there
Whether the spouse had income in that state
How long the member was stationed there

Sorting out which states require returns, which returns have already been filed, and which states have incorrectly assessed taxes requires a systematic review of the member's military history and tax records.

Problem 3: TSP and Military Retirement Issues

The Thrift Savings Plan issues affecting federal employees (described in our federal employee tax guide) apply equally to military members. Additional military-specific TSP issues include:

Combat zone contributions: TSP contributions from tax-exempt combat zone pay go into the traditional TSP on a tax-free basis, creating a mix of pre-tax and post-tax balances that complicates distribution taxation.
Roth TSP in combat zones: Contributions to Roth TSP during combat zone service are already tax-free, so the Roth conversion benefit is reduced.
Military retirement pay: Military pensions are taxable at the federal level. Virginia exempts the first $40,000 of military retirement income for qualifying veterans (age 55+). Failure to account for this exemption results in overpayment.
Disability retirement: Military disability retirement may be fully or partially tax-exempt, depending on the disability rating and the type of retirement.

Problem 4: Security Clearance Concerns

Many military positions and virtually all military-adjacent contractor positions require security clearances. Unresolved tax debt threatens these clearances through the same Guideline F analysis that applies to federal employees.

For transitioning service members who plan to work as defense contractors after leaving the military, resolving any tax issues before separation is critical. A cleared military member who separates with unresolved tax debt may find their clearance is not transferable to a contractor position.

Problem 5: Spouse Employment Tax Confusion

Military spouses who work in Virginia face a complex decision: use MSRRA protection to avoid Virginia tax, or file as a Virginia resident. The right answer depends on:

The domicile state's tax rate compared to Virginia's
Whether the domicile state will actually tax the income
The administrative burden of filing in the domicile state
Whether the spouse has Virginia-source income beyond wages

A spouse domiciled in a no-income-tax state (Texas, Florida, Tennessee, etc.) should almost always use MSRRA protection. A spouse domiciled in a high-tax state may actually owe less to Virginia.

Resolution Options Specific to Military

IRS Combat Zone Extensions

If your unfiled returns or unpaid balances relate to periods when you were deployed to a combat zone, the IRS provides automatic extensions:

Filing deadline extended by the time in the combat zone plus 180 days
Payment deadline extended similarly
Penalties and interest do not accrue during the extension period

Bill Fritton ensures that combat zone protections are properly applied to every military case.

IRS Fresh Start for Military

The IRS has expressed a policy of favorable treatment for military taxpayers, particularly those whose tax problems arose from deployment or PCS-related disruptions. While the same resolution programs (installment agreements, OIC, CNC, penalty abatement) apply, military-specific circumstances strengthen reasonable cause arguments for penalty relief.

Virginia Military Tax Benefits

Virginia provides several tax benefits for military members and veterans:

Military income subtraction: Active-duty military pay for Virginia domiciliaries is subject to Virginia tax, but various subtractions may apply
Military retirement exemption: Up to $40,000 of military retirement income is exempt from Virginia tax for qualifying veterans
Combat zone filing extensions: Virginia follows federal combat zone extension rules
SCRA compliance: Virginia recognizes SCRA domicile protections for non-resident service members

Innocent Spouse Relief

Military spouses who filed joint returns with a service member may qualify for innocent spouse relief if:

The service member understated income or overclaimed deductions without the spouse's knowledge
The couple is now divorced or separated
The spouse did not benefit from the understatement

This is particularly relevant in cases where one spouse managed the finances (common during deployments) and the other spouse was unaware of tax issues.

How Bill Fritton Helps Military Families

Bill Fritton's practice in Vienna, Virginia serves military families stationed throughout the state. His process for military tax cases includes:

Comprehensive Military Tax Review

Review military pay records (LES) for all relevant years
Identify SCRA and MSRRA protections
Map PCS history to determine filing obligations by state
Verify combat zone periods and applicable exclusions
Assess TSP transactions and military retirement income

Multi-State Filing Resolution

Determine which states require returns
File delinquent returns with proper military adjustments
Recover overpaid state taxes from states that incorrectly withheld
Resolve assessments from states that filed SFRs without military protections

IRS and Virginia Resolution

Negotiate installment agreements that account for military pay structures
Submit OIC applications with proper military income and expense documentation
Request penalty abatement based on deployment, PCS, or other military circumstances
Coordinate federal and Virginia resolution

Security Clearance Protection

Structure resolution to support clearance retention or reinstatement
Provide documentation of resolution progress for clearance authorities
Prioritize quick action on cases where clearance is actively threatened

Frequently Asked Questions

I am stationed in Virginia but my legal domicile is another state. Do I owe Virginia income tax?

No, not on your military income. Under the SCRA, your military pay is taxed only by your domicile state, not your state of assignment. You must ensure your Virginia withholding reflects this by filing the appropriate form with your finance office.

Does my spouse owe Virginia income tax on wages earned while I am stationed here?

It depends. Under MSRRA, your spouse can elect to maintain the domicile of the service member (or their own prior domicile) for income tax purposes. If that domicile state has no income tax or a lower rate than Virginia, the MSRRA election can save significant money. The spouse must file the appropriate paperwork with their Virginia employer.

I was deployed and missed several years of tax returns. What should I do?

Contact a tax professional immediately. Combat zone extensions may protect you from penalties and interest for the deployment period. Even without combat zone protections, filing delinquent returns with proper military adjustments (SCRA protections, military deductions, combat zone exclusions) typically reduces or eliminates any assessed balance.

Can the IRS garnish my military pay?

Yes. The IRS can levy military pay just like civilian wages. However, certain military allowances (BAH, BAS, etc.) may be partially protected. If you are deployed to a combat zone, the IRS is generally prohibited from taking collection action during the deployment plus 180 days.

I am transitioning out of the military and have unresolved tax issues. Will this affect my contractor career?

Yes, potentially. Defense contractor positions that require security clearances are subject to the same Guideline F financial responsibility standards. Resolving tax issues before separation, or at minimum demonstrating active resolution efforts, protects your ability to obtain or retain a clearance for contractor employment.

Does Virginia tax military retirement pay?

Virginia exempts up to $40,000 of military retirement income from state income tax for qualifying veterans who are age 55 or older. The exemption is phased in and may have additional requirements. Any amount above the exemption threshold is taxable by Virginia.

I PCSed through four states in the last six years and have not filed anywhere. Where do I start?

Start with a comprehensive review of your military history, domicile state, and income by year. A professional like Bill Fritton can map your PCS history against state filing requirements, determine which states require returns, and file everything in a coordinated manner. This prevents the confusion and duplicate assessments that come from filing piecemeal.

Can I change my legal domicile to a no-income-tax state?

Yes, but it requires more than just claiming it. To establish a new domicile, you generally need to take affirmative steps: register to vote in the new state, obtain a driver's license, register your vehicle, update your military records, and demonstrate intent to make that state your permanent home. Simply being stationed in a no-tax state is not sufficient. The change must be genuine and well-documented.

Virginia military tax debt specialist for a free consultation about your military tax situation.