Your employer has given you an opportunity to work overseas—an assignment that will provide immense career growth. You are excited and ready to adapt to the new environment; however, proper planning concerning state taxes prior to moving will help in saving significant taxes, penalties, and interest down the road. States can continue to assess income tax on your worldwide income if they determine you are still a resident. Changing your state residency when moving overseas may help you save on taxes and plan your financial future.
How Is State Residency Determined?
Before we discuss changing your state residency for an overseas move, we need to first look at how residency is determined. When it comes to state income taxation, the terms domicile and resident come into play. They determine where one will be taxed, and one’s domicile need not be where they are a resident.
Each state has its individual set of rules. Let’s take California for example.
California’s CCR § 17014 defines a resident as including
- every individual who is in the State for other than a temporary or transitory purpose, and
- every individual who is domiciled in the State who is outside the State for a temporary or transitory purpose.
The Code of Maryland Regulations (COMAR) 03.04.02.01B states the following:
“an individual is a resident of Maryland if the individual is domiciled in Maryland on the last day of the taxable year or if the individual maintains a place of abode in Maryland for more than six months of the taxable year and is physically present in the State for 183 days or more during the taxable year.”
3 Easy Steps to Change Your State Residency When Moving Overseas
Step 1: Abandon Domicile in Your Current State of Residency
For those moving overseas, abandoning domicile is the first step to take to move state residency. The intent of the taxpayer is a significant factor when determining domicile, which must be determined with reference to all of the facts and circumstances.
Maryland requires, in addition to intent, that the taxpayer take specific action to change their domicile. They must be physically present and establish ties in the new domicile while severing ties with the old domicile.
In Comptroller v. Lenderking, 268 Md. 613, 617-618 (1973), the Court determined that, where a taxpayer domiciled in Maryland left the state in December 1969 with no intention to return, as he did not establish a new domicile until October 1970, the taxpayer was held liable for payment of Maryland income taxes for the first ten months of 1970.
Step 2: Establish a New Domicile in the Desired State Prior to Your Move
How does one establish a new domicile and get official residency in a new state? In Maryland, for example, the two most important criteria are where you live and where you are registered to vote. Establishing stronger ties in your new habitat points to a new domicile. This includes:
- Location, use (rented versus owned), and size of residences
- Where time is spent
- Taxpayer’s occupation
- Items/possessions near and dear
- Active business involvement
- Family connections – where your family lives, the location of the children’s school, and social, community, and religious ties
- Auto registrations, bank accounts, safe deposit box locations
- Other items indicating taxpayer’s intention
A resident of California continues to be a resident when absent from the state for a temporary or transitory purpose. Changing residency in California requires:
- Abandonment of your prior domicile
- Physically moving to and residing in the new locality
- Intent to remain in the new locality permanently or indefinitely as demonstrated by your actions
For an expat leaving California, proving the abandonment of domicile can be difficult. Fortunately, California provides a safe harbor rule for those individuals who leave California:
- Under an employment-related contract for an uninterrupted period of at least 546 consecutive days,
- Do not have intangible income (e.g., from stocks, investments) exceeding $200,000,
- Are not leaving California to avoid personal income tax, and
- Do not return to visit California for more than 45 days during the taxable year
They can be considered nonresidents during their period outside of California.
If taxpayers cannot satisfy the safe harbor rule, they can still show non-residency under a facts and circumstances approach. Similar to Maryland and many other states, where you have the closest ties will point to where you are a resident. For California, this includes:
- Amount of time spent in California.
- Location of your spouse/RDP and children.
- Location of your principal residence.
- State that issued your driver’s license, vehicle registrations, professional licenses, and voter registration.
- Location of the banks where you maintain accounts.
- The origination point of your financial transactions.
- Location of your medical professionals and other healthcare providers (doctors, dentists, etc.), accountants, and attorneys.
- Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
- Location of your real property and investments.
- Permanence of your work assignments in California.
Step 3: Cut All Possible Ties After Changing Your State Residency
When changing your state residency in preparation for a move overseas, don’t forget to cut any ties with your home state that you can. Above, we discussed Maryland and California’s state residency rules; many states share similar rules. Below are some steps that can be taken to show your intent to terminate your state residency; they are not exhaustive and can vary depending on your state:
- Sell old home/purchase or lease new residence abroad
- Move family abroad
- Join associations overseas
- Obtain new medical and financial professionals abroad
- Close old bank accounts, open foreign bank accounts
- Register to be an absentee voter
- Sell automobile/change auto registration
With proper planning, you can be successful in showing that you have broken ties with your old state and proceed to create roots in your new environment.
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