Resident - If the taxpayer is a resident of Colorado they are subject to Colorado income tax on all income regardless of the source. This includes active duty military pay.
Nonresident - If the taxpayer is a nonresident of Colorado stationed in Colorado whose only source of income is active duty military pay, they are not required to file a Colorado return.
One spouse is a resident of Colorado and the other is not - A servicemember’s spouse may elect, for income tax purposes, to use the same state of residence as the servicemember. If a servicemember is not a Colorado resident, and is instead a resident of another state, his or her spouse can elect to also be a resident of that state and not a resident of Colorado.
Colorado does not permit a filing status change from the federal return. If they are married filing joint on the federal return, they are required to file married filing joint on the Colorado return and the spouse will be required to use the same residency status as the servicemember.
Spouse Income - Military Spouses Residency Relief Act (MSRRA)
The MSRRA allows military spouses who reside with their service member spouse stationed in a nonresident state on military orders to keep their resident state for tax purposes. This means if the spouse has income from the nonresident state, they are not required to pay taxes to the nonresident state but report this income on their resident state return.
In order to be eligible for the income exemption under the MSRRA in Colorado , the following conditions must be met by the military spouse/employee:
- The service person and their spouse are married.
- The spouse moved to Colorado from another state and the spouse works in Colorado.
- The spouse's sole purpose for being in Colorado is to accompany the service person while they are stationed in Colorado on military orders.
If the military spouse meets the eligibility requirements, they can avoid Colorado state tax from being withheld from their pay by providing their employer with an Affidavit of Exemption for the Nonresident Spouse of a Servicemember (DR 1059).
Note that if the spouse's Colorado employer withheld tax in error, the spouse's W-2 entry will need to be modified, removing the state wages in Box 16 but leaving the state withholdings in Box 17.
Note: This is an article on reporting military pay and military spouse pay in the TaxSlayer ProWeb program. It is not intended as tax advice.