Military personnel exempt from state tax

  • Published
  • By Nola Billups
  • Community Initiatives Team
Arizona Gov. Janet Napolitano signed House Bill 2975, Tax Exemption, Active Duty Pay June 20.

The bill, sponsored by Reps. Jonathan Patton, District 30; Pamela Gordon, District 6; Timothy Bee, District 30; Lucy Mason, District 1; and John McComish, District 20, codifies the state income tax exemption for active-duty members of the U.S. Armed Forces and expands the exemption to include reservists and Arizona National Guard members.

Last year, legislation enacted exempted military income for active-duty members of the armed forces from state income taxation during tax year 2006 (Laws 2005, Chapter 303). House Bill 2795 makes the tax exemption permanent. Prior to the one-year exemption, income for active duty service members was exempt from taxation only if the member was serving in a combat zone or if the member was hospitalized as a result of wounds, disease or injury sustained while serving in the combat zone.

According to a Joint Legislative Budget Committee fiscal note prepared for last year's legislation that included only active-duty personnel, there were 17,621 Arizonans in active-duty armed forces in September 2004, earning a total income of $411,354,800. Their average income was $21,800. The cost to the state general fund was estimated at $10,314,700.

Currently, individuals who are Arizona residents when entering military service are considered Arizona residents regardless of where the individual is stationed.

Such an individual continues to be an Arizona resident subject to state income tax until a change of domicile is established. Additionally, legal residents of other states stationed in Arizona on military orders are not liable for Arizona income taxes on military pay, but are liable for state income taxes on any other income earned from employment in Arizona.

The bill, effective Jan. 1, 2007, will make permanent the state income tax exemption of military income for active duty military members to also include military income for active service in the Arizona National Guard or Reserve.