Sell home before or after AD retirement?

[aknowhow78]

Hello everyone,
I am 46 year old active duty officer (06 CAPT) and plan on retiring 2021 (mandatory 30). I am married with 2 children (ages 3 and 12) stationed in Maryland. Original plan was to retire at 20 years of service but 2 days before the birth of our daughter, got my 06 promotion. Consequently decided to stay for 3 more years. Now at 24 years and have decided to stay for 30 (for now) because:
1.) My husband’s company will not transfer him to Florida due to unstable contract (contract in FL is only renewable every 3 months) and it make sense for me to stay active for state tax shelter purposes (FL is our home of domicile so we both don’t pay MD income taxes);
2.) Son’s school –he just got several offers to attend great private schools (offer are worth 40-52k/yr depending on which he selects) to play football and he worked really hard for this and wants it.
We are currently planning the following:
1) Do the 30 years and retire 2021 (same year son graduates from high school). No second/bridge career as 75% of base pay + husband salary will be more than enough
2) Husband will continue to work until he turns 62 (when daughter finish high school)
3) Start the draw of TSP and 401k (husband’s) at 4% rate upon husband’s retirement. This will provide us with 14k/month income (pension +TSP+401K)
4) Currently saving 35% of salary in post tax acct (right now in saving acct) in 6 years will be 250k, Maxing out TSP and 401K, and have transferred GI to children for college.
We currently own a home in FL (paid off) and MD (worth 750k have 450k mortgage) and this is where we need assistance. Upon retiring, we would like to keep our FL residence and not claim MD. We are not sure what the tax implication is for having a home in MD and husband continues to work in MD (currently protected from state income tax because I am AD) after my retirement. Any info on this?
Also what happens if we don’t sell our home in MD before I retire? Will my pension be subjected to MD income tax or could I still claim FL residence? Can husband still claim FL after I retire? If our MD home is considered our 2nd home…what are the tax implication of selling a second home vs. primary home in MD?

We greatly appreciate any assistance with this.

 

[RE2Boys]

Generally, once you leave active duty, you become a resident of the state you are living and working in. I believe your entitled to a last move to your home of record, but it doesn't sound like you intend to move back to FL.
So if you stay in MD, you will be subject to MD income tax (I don't know if your pension is taxable under MD law). Unless you live in FL, you can't claim FL residency for tax purposes.
If you sell your FL home while living in MD, any cap gains are taxable to MD and federal. I assume you would not meet the federal cap gain exclusion (living in home as main home for 2 of past five years).

 

[RE2Boys]

Just looked it up, the first $5000 of a military pension is not taxable to MD.
Also, when over 65, can exclude up to $29K in retirement income from MD state tax.

 

[38Chevy454]

I agree with RE2Boys that once you leave active duty, you become MD resident, assuming you live there and husband is still working in MD. Does not matter if you sell the MD house or rent, your residence is MD. So you might just have to tough out a few years of extra taxes in MD. From your numbers, it seems you will be good shape for retirement, once you hit 2021 and retire yourself, assuming your husband's income is sufficient as it seems with your high current savings rate. Does your husband need to work until he is 62? Where do you want to end up as retirement location? Stay in MD, or FL, or

 

[aknowhow78]

We really want to be in FL. We actually don't like MD. It such an awful state to retire. Only here because I am stationed here. We are thinking of selling the MD house and husband commuting from FL to work 3 days a week. While here getting a hotel near work. This will make Fl his residence and avoid MD income tax?


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[RE2Boys]

If you relocate to FL (after end of active duty) and your husband works in a state other than FL, then his earned income (W2 wages and/or self-employment) would be taxable by that state. Good news is that the tax would only apply to what is earned in that state, not apply to investment income.

 

[friar1610]

Just looked it up, the first $5000 of a military pension is not taxable to MD.
Also, when over 65, can exclude up to $29K in retirement income from MD state tax.

Don't know about the 2nd point but unless the law has changed, the $5k exemption from MD tax pertains only to enlisted folks. (I'm a retired USN captain; stayed in MD a number of years after retiring and got to pay MD tax on all my pension.)


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[friar1610]

We are not sure what the tax implication is for having a home in MD and husband continues to work in MD (currently protected from state income tax because I am AD) after my retirement. Any info on this?
.

In rereading this, my experience is that you may be on shaky ground if your husband works and earns in MD but doesn't pay state income tax there. You are the military member and can claim any state where you have a legitimate tie (such as owning the FL home.) I'm pretty sure the Soldiers and Sailors Relief Act does not extend that benefit to a civilian spouse. Might be worth running that scenario by your Legal Services Officer.


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[38Chevy454]

If you relocate to FL (after end of active duty) and your husband works in a state other than FL, then his earned income (W2 wages and/or self-employment) would be taxable by that state. Good news is that the tax would only apply to what is earned in that state, not apply to investment income.

Also your pension income would be exempt form MD tax. Just your husband's W-2 income form MD would be considered taxable. If your husband was considered a contractor, rather than employee, you could also deduct the travel expenses. But being an employee, you will just have to pay it out of pocket.

 

[aknowhow78]

Don't know about the 2nd point but unless the law has changed, the $5k exemption from MD tax pertains only to enlisted folks. (I'm a retired USN captain; stayed in MD a number of years after retiring and got to pay MD tax on all my pension.)


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Thanks Friar. while you were AD was MD your state of domicile? How bad was the tax? I am reading everywhere that MD is one of the worst stats to retire.. We have property here don't know what the tax will be if we sell as residents vs.nonresident. I think if we sell before I retire I can claim primary resident status as we live here because I am AD but after I retire, then its considered nonresident?

 

[aknowhow78]

Also your pension income would be exempt form MD tax. Just your husband's W-2 income form MD would be considered taxable. If your husband was considered a contractor, rather than employee, you could also deduct the travel expenses. But being an employee, you will just have to pay it out of pocket.

Thank you this info is very helpful... Thinking we would have file married but separate for MD tax to assure that my pension is not tax by MD?

 

[aknowhow78]

Generally, once you leave active duty, you become a resident of the state you are living and working in. I believe your entitled to a last move to your home of record, but it doesn't sound like you intend to move back to FL.
So if you stay in MD, you will be subject to MD income tax (I don't know if your pension is taxable under MD law). Unless you live in FL, you can't claim FL residency for tax purposes.
If you sell your FL home while living in MD, any cap gains are taxable to MD and federal. I assume you would not meet the federal cap gain exclusion (living in home as main home for 2 of past five years).

In rereading this, my experience is that you may be on shaky ground if your husband works and earns in MD but doesn't pay state income tax there. You are the military member and can claim any state where you have a legitimate tie (such as owning the FL home.) I'm pretty sure the Soldiers and Sailors Relief Act does not extend that benefit to a civilian spouse. Might be worth running that scenario by your Legal Services Officer.


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The Military Spouse Residency Relief Act (MSRRA)signed in 2009 allowed my husband to keep the same resident state as me and therefore he does not pay income tax to MD.

 

[friar1610]

The Military Spouse Residency Relief Act (MSRRA)signed in 2009 allowed my husband to keep the same resident state as me and therefore he does not pay income tax to MD.

Interesting. I retired well before then so am not as current as I thought I was.

Wish that had been around when my wife worked in MD!

 

[friar1610]

Don't know about the 2nd point but unless the law has changed, the $5k exemption from MD tax pertains only to enlisted folks. (I'm a retired USN captain; stayed in MD a number of years after retiring and got to pay MD tax on all my pension.)


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Thanks Friar. while you were AD was MD your state of domicile? How bad was the tax? I am reading everywhere that MD is one of the worst stats to retire.. We have property here don't know what the tax will be if we sell as residents vs.nonresident. I think if we sell before I retire I can claim primary resident status as we live here because I am AD but after I retire, then its considered nonresident?

I was not a MD resident until the day after I retired from the Navy. MD income tax - both state and county - and property taxes are on the high side but I don't recall all the specifics (and my info would be dated anyway. I've lived in two other states since then and all the details run together.) You can get that all on the web anyway.

I didn't dislike MD as much as you seem to. I spent 21 years there on and off both on active duty as a retiree and found it to be a decent place. It's not where I would have wanted to stay forever, but I did work there for a number of years after Navy retirement. But I understand people have different tastes. (Example: FL is definitely not my bag.) If you were ever interested in working for a defense contractor after Navy retirement, I think you would find robust and well paying job opportunities in MD (depending, of course, on your Navy specialty.)

I believe your state of residence has little to do with how much tax you will pay on the sale of a house (assuming you make money on it which I hope you do) You would be paying a capital gains tax on the profit, regardless of where you are domiciled since the CG was generated in MD. At least that's my understanding/recollection. You will be better getting those questions answered by someone with more current MD experience.

Also, as you start thinking of retirement, check out this web site:

The Military Guide - Military Guide

It's run by a guy who used to post a lot on this site but apparently spends more time these days running his web site, updating his book, etc. Retired USN and very knowledgeable.

 

[aaronc879]

Looks like MD's state income tax rate is actually well below the average. Still not as good as Florida's
http://www.taxadmin.org/fta/rate/ind_inc.pdf

 

[aknowhow78]

Thank you so much. Somehow I associate MD with work and can't seem to relax here. I work on gene vector development for human research and do not plan on a second/ bridge career. Would like to retire and travel with my kids. Son would in college but daughter will be 8 years old. Husband can work and I can spend the money lol.

 

[aknowhow78]

Wow....this is so helpful. Much obliged.

 

[RE2Boys]

Don't know about the 2nd point but unless the law has changed, the $5k exemption from MD tax pertains only to enlisted folks. (I'm a retired USN captain; stayed in MD a number of years after retiring and got to pay MD tax on all my pension.)

Per this link and the referenced MD tax booklet, page 14, code u, there is no mention of the $5K exemption applying to only enlisted personnel.
Military Retirement Income

 

[friar1610]

Per this link and the referenced MD tax booklet, page 14, code u, there is no mention of the $5K exemption applying to only enlisted personnel.
Military Retirement Income

Well, it looks like another law has changed since I lived and retired from the military in MD. Thanks for the clarification. (And, again, too bad that didn't apply when I could have used it.)

 

[harley]

Looks like MD's state income tax rate is actually well below the average. Still not as good as Florida's
http://www.taxadmin.org/fta/rate/ind_inc.pdf

That document only lists MD's state tax. Each county also adds a piece, as do some of the cities. As a refugee from MD who moved his residence to FL, I can say it's definitely on the more expensive side, although not as bad as NY, NJ, or CA. We still have a home there too, but have to make sure we don't stay there more than 180 days/year. One of the main reasons for choosing FL (over and above income tax) is the really lousy estate/inheritance tax situation in MD.

Of course, FL has it's problems too. My personal pet peeve has been dealing with home insurance, especially because I also own homes in other states. And truthfully, as bad as MD drivers can be, I always look forward to getting back there after 6+ months driving in FL. One lesson I learned down there is to always look both ways when turning, since some of the drivers like to drive down the wrong side of the road.

 

[friar1610]

That document only lists MD's state tax. Each county also adds a piece, as do some of the cities.

As I've demonstrated elsewhere in this thread, my information is dated and/or my memory foggy. But I believe the two counties I lived in (Montgomery and Baltimore, at different times) had a 50% piggyback on the state income tax. I think some counties were 55%.

 

[Nords]

Welcome to the forums, aknowhow!

Also what happens if we don’t sell our home in MD before I retire?
We greatly appreciate any assistance with this.

Right now you can show that your MD home is your primary residence and your FL home is a rental property.

When you retire, you have to become a resident of a state. There are various ways to declare your domicile, but if you retire in MD and still have ties to the state (MD real estate, your spouse's MD job) then about 30 days later they're going to decide you're a MD resident. It's a tug-of-war between the two states (and two sets of tax returns) to decide which place you pay what taxes.

You want to sell your primary residence while you're still on active duty and still a FL resident. That way you can roll over the capital gains into another residence in FL (keeping your FL rental as a rental) or even pay the taxes. It'll be a lot easier to handle that as a FL resident. Then when you retire, you're just a FL tourist in MD for a few weeks.

If I were in your situation, I'd put the MD home on the market as soon as you reach your last day in the office or whenever (before you retire) you pack out your household goods.

As a servicemember you have a certain number of years to roll over the cap gains from the sale of a primary residence, but once you retire then you may no longer qualify for that option. The only thing I'm sure of is that MD will tax you more harshly than FL no matter what you decide to do with the capital gains.

Another option would be to move back into your FL residence for two years to convert that back into a primary residence. But again it might make more sense to leave it as a rental property while you choose the primary residence you really want.

If your spouse is working in MD after you're retired from active duty, then he's a FL migrant laborer working in MD and he'll owe taxes to MD (and the county). He has to reeeeeally love the job to pay those taxes. Maybe the situation will change over the next few years and he'll find a way to both live and work in FL... assuming that he still cares to work.