Moving overseas can be both exciting and challenging, particularly when it comes to understanding state tax obligations as a US expat. This article will clarify what you need to know about state and federal taxes and what to do to avoid them.
DO EXPATS NEED TO FILE STATE TAX RETURNS?
US expats’ need to file state tax returns depends on their residency status and income earned, including self-employment income, dividend income, and other forms of income while living abroad. Domicile-based or statutory state residency rules apply. Green card holders may also have to report worldwide income. Some states offer exclusions or tax credits for foreign taxes paid to avoid double taxation.
Establishing non-residency typically exempts expats from filing state tax returns, except for those with income from that state. States without an income tax, such as Florida, Texas, and Nevada, don’t require state tax filings. Moving abroad or returning to the US during the tax year may require expats to file a part-year resident tax return.
STATE RESIDENCY RULES FOR TAX PURPOSES
Each state has its own set of rules to determine residency for tax purposes. Understanding these distinctions can help you navigate your state tax responsibilities and ensure compliance with relevant laws and regulations.
Domicile refers to your permanent home or the place you intend to return to after living abroad. Some states consider you a resident for tax purposes if you maintain a domicile within their borders, even if you live abroad for an extended period. As a result, you may be required to file a state tax return and pay taxes on your worldwide income, including tax income from various sources.
To determine your domicile, states typically consider factors such as your primary residence, voter registration, driver’s license, and other connections to the state. Be sure to familiarize yourself with the specific rules of your home state to avoid any surprises come tax season.
In contrast to domicile-based residency, some states apply a statutory residency test to determine your tax status. This test is based on the number of days you spend in the state during the tax year. If you exceed a certain threshold (e.g., 183 days), you may be considered a resident for tax purposes and be subject to state taxes on your income.
It’s crucial to keep track of your time spent in the state to accurately assess your residency status. Be mindful of the specific thresholds and requirements for statutory residency in your home state, as they can vary.
DO US EXPATS PAY STATE TAXES?
In general, if a US expat is considered a resident of a particular state, they may be required to pay state taxes on their income earned both within and outside of the United States. However, if they are not considered a resident of any state, they may not be subject to state taxes.
It’s also worth noting that some US states, such as Florida, Texas, and Nevada, do not have a state income tax. If a US expat is considered a resident of one of these states, they may not have any state tax obligations.
HOW DO YOU DETERMINE IF YOU ARE A RESIDENT OF A PARTICULAR STATE?
For U.S. expats living in a foreign country, determining residency in a particular state can be more complex since they may not have a physical presence in the United States for extended periods. However, it is still important to establish residency for various purposes, such as taxes or voting. Here are some factors to consider when determining your state residency as a U.S. expat:
Last domicile: The state in which you last had a permanent residence before moving abroad is often considered your state of residency. If you have maintained connections to that state, such as owning property or having family there, it may strengthen your claim to residency.
Tax filing: As a U.S. citizen, you are required to file a federal income tax return regardless of where you live, and you may have income tax obligations in your country of residence. Some states also require you to file state income tax returns, and you may have to meet a specific filing threshold. Your state of residency could be determined by the state to which you pay taxes, or the state that considers you a resident for tax purposes.
Voter registration: If you are registered to vote in a particular state, this may be considered an indication of your state residency. U.S. citizens living abroad can vote using an absentee ballot, which is generally sent to the last state where they were registered.
Driver’s license and vehicle registration: Holding a valid driver’s license and vehicle registration in a specific state can also help establish your residency.
Bank accounts and financial connections: Having bank accounts, credit cards, or other financial connections to a specific state may help in determining residency.
Professional licenses: If you maintain a professional license in a specific state, this could be considered evidence of your state residency.
HOW TO ESTABLISH RESIDENCY IN A NO INCOME TAX STATE AS A US EXPAT LIVING ABROAD?
Obtain a driver’s license: To establish residency in a no income tax state, visit the Department of Motor Vehicles (DMV) in your chosen state to obtain a driver’s license. You’ll typically need to provide proof of your new address and may need to pass a driving test, depending on the state’s requirements.
Set up a mailing address: Establishing a mailing address in the no income tax state is crucial. You can either rent a mailbox or use a physical address, such as that of a relative or friend.
Register to vote: Updating your voter registration to reflect your new address in the no income tax state is important. This not only helps establish residency but also ensures that you can exercise your right to vote in the state.
By following these steps, you can establish residency in a no income tax state and avoid ongoing state tax obligations while living abroad as a US expat.
WHICH STATES ARE INCOME TAX-FREE?
There are nine US states that do not impose state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee also do not tax wage income, but they do tax investment income. As an expat, it is important to understand your income tax obligations in your country of residence, including any passive income you may have. You may also need to file a federal return and meet a specific filing requirement, depending on your income and situation.
WHAT US EXPATS LIVING ABROAD NEED TO KNOW ABOUT CALIFORNIA STATE TAXES
California is a unique case when it comes to state income tax for expats, as they do not recognize the Foreign Earned Income Exclusion (FEIE). This means that even if you qualify for FEIE on your federal tax return, you may still owe California state income tax on your worldwide income.
California’s aggressive tax approach on worldwide income for its residents can be attributed also to strict domicile and residency rules, and the limited application of the Safe Harbor Rule. As a result, California expats often find themselves liable for state taxes even after leaving the country.
Non-recognition of FEIE: One of the main reasons for California’s aggressive tax approach is that the state does not recognize the Foreign Earned Income Exclusion (FEIE). The FEIE allows US citizens and resident aliens to exclude a certain amount of their foreign earned income from federal taxable income. However, California still taxes this excluded income at the state level, creating a heavier tax burden for expats.
Strict domicile and residency rules: California tax law differentiates between “domicile” and “residency.” Domicile refers to the place a person intends to remain indefinitely or return to after an absence. Residency, on the other hand, pertains to where a person is physically present. An individual can have multiple residences but only one domicile. California considers a person who leaves the state without establishing a new domicile elsewhere as a California resident for tax purposes. Furthermore, the state can still classify someone as a resident if they maintain significant connections to California, such as maintaining a home, having a California driver’s license, or voting in California elections.
The Safe Harbor Rule: According to California’s Safe Harbor Rule (Revenue and Taxation Code Section 17014(d)), an individual may be considered a nonresident for tax purposes if they meet specific criteria. These criteria include maintaining a permanent residence outside of California, being present in the state for less than 45 days during the taxable year, and having a clear purpose for being outside of California, such as an employment contract. However, this rule doesn’t apply to individuals who earn more than $200,000 in California-source income or have a spouse or registered domestic partner who remains a California resident.
At 1040 Abroad, we understand the complexities of US tax obligations for expats and are committed to providing free tax advice to all US expats via email. Our team of expert accountants can guide you through the process and ensure that you stay compliant with all applicable tax laws. Don’t hesitate to reach out to us for help navigating your state tax obligations as a US expat living abroad.
Have a question? Contact Olivier Wagner, 1040 Abroad.
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1 comment on “US Expats Abroad: Understanding Your State Tax Obligations”
There are too many permutations of domicile (defined quite differently in foreign, especially civil-law) countries, residence and nationality. And what about dual nationals and a child born abroad to a U.S. citizen who may or may not him/herself be a U.S. citizen? What about being registered to vote in multiple states but actually voting in none? These are just a few issues I’ve had to deal with in my post-retirement pro bono practice. (Just as a truck driver or retiree with an RV needs and gets a driver license somewhere without admitting domicile or residence, so expats need — and usually get — a license without always a tax obligation.) Finally: as you imply without stating: states are not obliged to grant road-test-free licenses to migrants from other states but I think all rob(subject to eye test and sometimes written test). But a number of states refuse to recognize Puerto Rico driver licenses for anything except tourists passing through. Probably also VI and Guam but what do I know. There are various state compacts on licenses and on taxes that should be read by anyone concerned: these are regional and/or selective.