The need to file US federal taxes is reiterated repeatedly when searching for information about expat taxes, but what is not often explained is whether you need to file a US state tax return. The United States is made up of 50 states, each with its own governing body that determines whether or not to assess taxes on its residents. Since the states have unique laws and regulations, each state’s requirements for filing taxes are different. Generally,US state tax returns take your income and apply the laws and regulations specific to that state to determine tax.
Requirements to File a US State Tax Return
First, you need to determine if you are a resident of the state or, more importantly, if the state considers you a resident for tax purposes. Most states may consider you a resident if you meet one or more of the following criteria:
- You lived in the state at any point during the year.
- Your immediate family (spouse and minor children) lives in the state while you are abroad.
- You return to the state each time you return to the US to live.
- You maintain an abode in the state. An abode is a permanent place of residence.
- You keep a driver’s license or ID card or voting rights in the state.
Next you will need to figure if you have income from that state.
- Income earned from working in the state, before or after moving abroad, is almost always taxable in the state.
- Other income that is generated from a state source, such as pension income, retirement income, or government benefits may be taxable if you are considered a resident of the state.
- Each state determines residency requirements, but most states consider you to be a non-resident if you live outside the state for more than half the year.
States With No Income Tax
These states do not levy income tax on personal income. So, state tax returns are not a filing requirement. These states get their revenue from other sources, such as property tax and sales tax.
- South Dakota
- Washington State (not DC)
Additionally, New Hampshire and Tennessee only assess income tax on dividend and interest income.
Some states make ending your formal residency a challenge. These states categorize you as a resident even if you move away permanently. They consider you a resident of the state if you have one or more of the following ties to the state:
- Property ownership
- State driver’s license or identification card
- Bank accounts or investment accounts held in the state
- Voter registration – even absentee ballots
- Mailing address in the state – either at a Post Office Box or a relative’s house
- Dependents still living in the state – spouse or children
The “stickiest” states for expats are California, South Carolina, New Mexico, and Virginia. These states have the most stringent residency definitions, and they tax worldwide income. You would need to report all your income on the state tax return, and pay taxes on the income to the state – even if you didn’t live in the state during the year! These states consider moving abroad as a temporary leave of absence unless you can remove your ties to the state.
Properly severing your ties in these states before you move abroad is crucial, as these states only recognize a change to another US state (not a foreign country) as a change in residency. Closing or moving bank accounts, selling property, and changing driver’s licenses to another state are all ways to assure that you will not pay state taxes on your income to these sticky states. Planning ahead and changing your residency (preferably to a state without any income tax!) can save you hundreds of dollars in state taxes.
Not sure if you need to file State or Federal Tax Returns? Not to worry. Get started on your US expat taxes with the experts at Greenback. Click here to get matched with an accountant to review your individual situation today and confirm what you need to file.
California’s “Safe Harbor” Non-Residency Rules
California has a classification called the “Safe Harbor” rule to allow for residents of California to be classified as non-residents for tax purposes if they leave the country on employment-related contracts. This rule can be applied if the taxpayer is outside the state of California for at least 546 consecutive days (a year and a half) and has less than $200,000 of investment income during the year. The taxpayer can return to California for visits of less than 45 days during the year. Qualifying taxpayers can file a non-resident tax return using the ‘safe harbor’ rule, even if they would typically be considered a resident of California.
All the Other States
The remaining 37 states with income tax generally only require you to file a state tax return if you lived in that state during the year. These states usually tax income generated or earned in the state. Income from sources received while living abroad may also be taxed in the state; this type of income includes retirement payments and investment income (interest and dividends). Proper management of state sourced income should be taken into account when doing your expat tax planning, as it could create unexpected state tax payment and filing obligations.
State Tax Planning
Unfortunately, changing your residency is not easy. You should do a measure of planning before your final departure from the US. Planning ahead can save you a lot of time and money when it comes to state taxes.
- If you are planning on changing your residency to another state before you move overseas, try to make the change several months or a year ahead of time.
- Make sure your whole family makes the change with you. Immediate family members still living inside a state indicates that you intend to return to the state and that your living circumstances overseas are temporary.
- Cut as many ties to the state you are leaving as you can. Closing bank accounts, changing your driver’s license, and selling property are all ways to show that you don’t intend to return to the state in the foreseeable future.
Every state has its own tax laws and regulations. Every taxpayer’s situation is unique and should be evaluated annually in order to properly apply the state tax laws, and to make the most of your expat tax status. Taxpayers should be aware that not only federal tax laws could apply to their income!
Editor’s note: this article was originally published in February 2016; updated on October 7, 2019.
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