Income Tax Topics: Military Servicemembers

Several special rules apply in determining the Colorado income tax liability of an active duty or retired military servicemember. Whether and how a servicemember’s income is taxed depends largely on the servicemember’s state of legal residence. Additionally, military retirement benefits may be fully or partially exempted from Colorado taxation. This publication provides information regarding various Colorado tax rules that apply to active duty and retired military servicemembers.

This publication is designed to provide general guidance regarding certain tax rules and requirements applicable to military servicemembers and to supplement guidance provided in the Colorado Individual Income Tax Guide. Nothing in this publication modifies or is intended to modify the requirements of Colorado’s statutes and regulations. Taxpayers are encouraged to consult their tax advisors for guidance regarding specific situations.

In general, a military servicemember is any member of the Army, Navy, Air Force, Marine Corps, Space Force, or Coast Guard. For the purpose of determining residency under federal law, as discussed in the following section of this publication, but not with respect to any other guidance presented in this publication, military servicemembers include members of the Commissioned Corps of the National Oceanic and Atmospheric Administration and the Commissioned Corps of the Public Health Service.

Special rules under both state and federal law determine the states of residency for military servicemembers and their spouses. Residency determines, among other things, whether a state can impose income tax on a servicemember’s military pay.

Military servicemembers

For state income tax purposes, a servicemember does not lose or acquire residency in a state as a result of being physically present or absent in that state solely in compliance with military orders. Consequently, a servicemember will generally retain their state of residency from when they entered military service, regardless of where they are stationed, unless they take steps to change their state of residency.

A servicemember who is a Colorado resident does not lose their Colorado residency simply because they are stationed outside of Colorado. A servicemember who is not a Colorado resident does not become a Colorado resident simply because they are stationed in Colorado.

Generally, if a military servicemember changes their state of legal residence, they will certify the change by filing Department of Defense Form 2058, which states, “the formula for changing your State of legal residence/domicile is simply stated as follows: physical presence in the new State with the simultaneous intent of making it your permanent home and abandonment of the old State of legal residence/domicile.” However, see page 3 of this publication for information regarding the reacquisition of Colorado residency by military servicemembers.

Servicemembers’ spouses

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.  No specific step is required to make this election, but any spouse making an election not to be a Colorado resident should provide to their employer a completed Affidavit of Exemption for the Nonresident Spouse of a Servicemember (DR 1059) and mark the applicable box on the Part-Year Resident/Nonresident Tax Calculation Schedule (DR 104PN) filed with their Colorado income tax return to indicate their nonresidency.

Additionally, if a servicemember and his or her spouse have as their shared state of residence a state other than Colorado, the spouse also does not become a Colorado resident simply because he or she is in Colorado solely to be with the servicemember who is serving in compliance with military orders.

Servicemembers stationed outside the U.S.

Any servicemember whose domicile is Colorado and who spends at least 305 days of the tax year stationed on active military duty outside of the United States, including its possessions may, but is not required to, elect for that tax year to be treated as a nonresident of Colorado for Colorado income tax purposes. The 305 days do not have to be consecutive, but all 305 days must occur within the tax year for which the election is made.

The spouse of any servicemember who makes the election to be treated as a nonresident may also elect to be treated as a nonresident for the tax year if the spouse accompanies the servicemember for at least 305 days of the tax year while the servicemember is stationed on active military duty outside of the United States.

A servicemember and spouse, if applicable, make the election to be treated as nonresidents of Colorado by checking the applicable box on the Part-Year Resident/Nonresident Tax Calculation Schedule (DR 104PN) filed with their Colorado income tax return.

In general, the income of any Colorado resident is subject to Colorado taxation, regardless of whether the Colorado resident is a servicemember or a servicemember’s spouse. The military compensation earned by a servicemember who is a Colorado resident is generally subject to Colorado income tax, regardless of the state in which the servicemember is stationed. However, see page 3 of this publication for information about the income tax subtraction allowed to servicemembers who reacquire Colorado residency.

Every Colorado resident is required to file a Colorado income tax return if they are required to file a federal income tax return or have otherwise incurred a Colorado tax liability.

If any Colorado resident receives income from sources in another state and the income is taxed by both by that state and Colorado, the Colorado resident can claim a credit on their Colorado income tax return for such taxes paid to the other state. See FYI Income 17 for additional information about credits for taxes paid to other states.

Military family relief fund grants

An income tax subtraction is allowed for any amount received as a grant from the Military Family Relief Fund, to the extent that it is included in federal taxable income. Please visit DMVA.Colorado.gov/services for additional information about the fund.