Resident - If the taxpayer is a resident of Hawaii they are subject to Hawaii income tax on all income regardless of the source. This includes active duty military pay.
Taxpayers may exclude a portion of their military reserve or Hawaii National Guard duty pay from their income, effective for taxable years beginning after December 31, 2021. (Act 197, SLH 2004)
Nonresident - If the taxpayer is a nonresident of Hawaii stationed in Hawaii whose only source of income is active duty military pay, they are not required to file a Hawaii return.
One spouse is a resident of Hawaii 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 Hawaii 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 Hawaii.
Hawaii allows taxpayers to file MFS even when they have filed joint on their federal return. (TaxSlayer Pro does not currently support this option.)
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 Hawaii , the following conditions must be met by the military spouse/employee:
- The servicemember (as defined in 10 U.S.C. §101(a)(5)) is present in Hawaii solely in compliance with military or naval orders; and
- The spouse is in Hawaii solely to be with the servicemember.
If the military spouse meets the eligibility requirements, they can avoid Hawaii state tax from being withheld from their pay by providing their employer with a Hawaii Employee's Withholding Allowance and Status Certificate.
In the nonresident return, to claim a refund of taxes withheld from the Hawaii income in error you have to indicate the return is being filed under the MSRRA rules and then allocate the income away from Hawaii.
First, indicate in the return header the MSRRA exemption:
- Personal Information
- Other Categories
- Military Spouses Residency Relief Act - Select and answer Yes.
Second, from the nonresident Hawaii Tax Return menu select:
- Hawaii AGI
- Wages, Salaries, Tips, etc.
- Adjustments to State Wages (+/-) - Enter the spouse wages as a negative number.
Per the N-15 instructions, in addition to the taxpayer's and spouse's W-2s, a return taking the MSRRA exemption must have the following documentation attached:
- The servicemember’s military or naval orders assigning the servicemember to a post of duty in Hawaii;
- A valid, unexpired military spouse identification card that identifies the card-holder as a spouse and not merely a dependent; and
- The servicemember’s Leave and Earnings Statement indicating that the servicemember’s legal residence for purposes of withholding state income taxes from military pay is a state other than Hawaii.
TaxSlayer Pro does not yet provide a PDF attachment point for this documentation, thus a return claiming the MSRRA exemption cannot be electronically filed in TaxSlayer Pro.
Note: This is an article on reporting military pay and military spouse pay in the TaxSlayer Pro program. It is not intended as tax advice.