By John Stambaugh Commentary

Dear Mr. Stambaugh,

Like any Red-Blooded American I am always looking for a way to lower my state tax bill. A couple of my friends claim Texas as their home state. Since Texas has no state income tax this seems like a great deal on the surface. How is this possible? The one friend is retired military and has lived in state (after retirement) for the last decade. The other friend is a farmer and has lived locally all of his life. Am I missing out on a Golden Loophole? Is there a way that I can establish residency in the state of Texas and avoid Oklahoma State Income Taxes?


Looking For a Deal

Dear Looking,

To answer your question let's look at what the Oklahoma income tax law says.

Who must file in Oklahoma?

If you are an Oklahoma resident and have sufficient gross income to require the filing of a federal income tax return you are required to file an Oklahoma return. It doesn't matter whether the source of the income is from inside or outside Oklahoma.

If you are a nonresident with gross income from Oklahoma sources of $1,000 or more you are required to file an Oklahoma income tax return.

Who is resident of Oklahoma?

An Oklahoma resident is a person domiciled in this state for the entire tax year. Domicile is the place established as a person's true, fixed and permanent home. It is the place you plan to return whenever you are away (as on vacation, abroad, on business assignment, on education leave or on a military assignment). A do-micile, once established, remains until a new one is adopted.

With this bit of Oklahoma law let's analyze your two friends' situations. Your farmer friend has "lived locally all his life." It appears his true, fixed and permanent home is local, that is within the borders of Oklahoma. He therefore is a resident of Oklaho-ma. Consequently, if he has sufficient income to be required to file a federal income tax return, he has an Oklahoma income tax return filing requirement.

Your retired military friend appears to present a special case, but only on the surface. The old law known as the Soldiers' and Sailors' Civil Relief Act, originally passed during World War II, was rewritten by Congress and signed into law by President Bush in 2003. It is this law that gives active duty military members the ability to ignore state law in regard to residency. Active duty personnel can keep another state as their place of residency and pay taxes in that state, even though they may be Oklahoma residents under Oklahoma law.

But note, this is for active duty service members. This unique ability terminates when you reach retirement status. So, if you meet residency requirements in Okla-homa and you have a federal filing requirement, you must file an Oklahoma income tax return. However, any individual retired from any component of the Armed Forces may exclude the first $7,500 for tax year 2005 ($5,500 for years prior to 2005) of his/her military retirement pay from Oklahoma taxation.

So, gentle reader, what we learn is your friends are Oklahoma residents and may have Oklahoma income tax return filing requirements. Individuals can and do go to jail for failing to file Oklahoma income tax returns and failing to pay the required Oklahoma income tax.

Stambaugh is a local certified public accountant with more than 18 years experience in business tax planning and tax preparation and a master's degree. He can be reached at 234-2438.

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