U.S. Expat State and Income Tax

What You Should Know About State Taxation If You're An US Expat

You’re constantly reminded as an expat that you must submit a Federal Tax Return each year to stay in compliance with the IRS. However, for some expats, there is an equally vital requirement that is sometimes overlooked: submitting state taxes. Because each state has its own governing body (and thus its own set of laws and regulations), the criteria vary depending on where you lived before moving abroad. If you’re an expat living abroad, there are a few things you should know about state taxes.

Understanding U.S. Expat State and Income Tax

When Do I Have To File A State Income Tax Return?

Depending on your home state, you’ll need to be aware of certain rules. If you live overseas, you may not be required to file state tax for expats; in fact, several states do not have state income taxes at all. Here’s how to figure out if you have to file:

Determine Whether You Are A Tax Resident of The State

The following factors would decide this:

1) You resided in the state for at least part of the tax year.

2) You have immediate family in the state while you are away.

3) You return to the state every time you visit the United States.

4) You have a residency in the state.

5) You keep your driver’s license or identification card, as well as your right to vote in the state.

Determine Whether You Have A Source Of Income in The State

1) In almost all cases, income generated while working in the state is taxable in the state.

2) If you’re a resident of the state, other income from a state source, such as pension/retirement income or government benefits, may be taxable.

3) While each state’s residency rules vary, most states consider you a non-resident if you live outside the state for more than six months.

Which US States Have No Income Tax?

State income taxes, fortunately, do not apply to some US taxpayers. This is wonderful news for expats because it means that regardless of whether you are a resident of the state, you will not be liable to state tax if you receive income earned in that state. It’s worth noting that, despite the absence of an income tax, many governments still rely on other sources of revenue, such as property taxes and sales taxes.

These states do not currently tax wages:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

Furthermore, only dividend and interest income are taxed in these states:

New Hampshire
Tennessee

Which States Make It Mandatory To File Income Taxes For Expats?

Most states only require you to file a state tax return if you lived in the state for the whole year, and they usually only tax income earned within the state (for more information, visit your state’s government website). Income from sources received while living overseas, such as retirement benefits or investment income, may be taxed in the state. When preparing your tax for expats, keep in mind that income derived from the state may force you to file a tax return.

Some States Make It Difficult To Avoid Paying Taxes

There are four states, however, where the rules are less clear. Because the process for completing a state tax return as an expat might be complicated, these states are referred to as “sticky” states:

1) The state of California.

2) The state of South Carolina.

3) The state of New Mexico.

4) The state of Virginia

Small details about losing your formal residency in some states can result in a filing obligation. These states specifically consider you a resident if you have one or more of the following ties to the state:

1) Possession of real estate.

2) A state-issued driver’s license or identification card.

3) State-owned bank accounts or investment accounts.

4) Registration of voters

5) A state-based mailing address (a P.O. box or a relative’s home).

6) Remaining dependents in the state (spouse or children).

In comparison to other jurisdictions, all four of these states have relatively strict residence rules and tax worldwide income. Even if you didn’t live in the state for the entire year, you’d have to record all income on your state tax return and pay taxes to the state!

How To Get Around Taxes In Tough States

Unless you can erase your ties to the state, these four places consider relocating overseas to be a temporary leave of absence. Because many governments only recognize a change in residency as a change to another state (not another nation), it’s necessary to properly dissolve ties before relocating abroad. Closing or relocating bank accounts, selling property, and changing your driver’s license to another state can all assist you avoid paying state tax on your income in these tricky states.

Most expats in high-tax states may wish to consider relocating to a tax-free jurisdiction. When migrating abroad, there are several advantages to having a US bank account, state voting registration, and other things. As a result, moving to a different state can help you avoid paying state taxes while still allowing you to take advantage of these benefits.

Are You Relocating To Another Country? Make Your State Taxes A Priority

As you can see, state tax planning can be tricky, so you should take the required steps before moving abroad. Making state residency changes, transferring your entire family with you, and severing as many ties as possible with your home state are all strategies to avoid having to file state taxes while living overseas. Because state taxes for expats can be complicated, it’s a good idea to speak with an expat tax professional to receive the expat tax advice you need. Download our tax guide for Americans working abroad for more expat tax tips and advice.