As an expat, you’re consistently reminded that you need to file a Federal Tax Return each year in order to stay compliant with the IRS. However, there is an equally important requirement for some expats that can easily be overlooked – filing state taxes. Because each state has its own governing body (and with that, different laws and regulations), requirements differ based on where you lived before you moved abroad. Here are a few things you should know about state tax for expats if you’re living overseas.
When Would I Need to File a State Tax Return?
There are specific rules you’ll need to be aware of, depending on your home state. In some cases, you won’t need to file state tax for expats if you’re living abroad; in fact, a few states don’t even have state income taxes at all. Here’s how to know if you need to file:
1. Determine if you’re a resident of the state, or if the state considers you a resident for tax purposes. This would be determined by the following:
- You lived in the state at any point during the tax year.
- Your immediate family lives in the state while you’re overseas.
- You return to the state each time you return to the US to live.
- You maintain an abode in the state (a permanent place of residence).
- You keep your driver’s license or ID card or voting rights in the state.
2. Determine if you have income in the state:
- Income earned from working in the state is almost always taxable in the state.
- Other income generated from a state source – like pension/retirement income or government benefits – may be taxable if you’re a resident of the state.
- Residency requirements are determined by the individual state, but most states consider you a non-resident if you live outside the state for more than half a year.
Which States Are Income Tax-Free?
Fortunately, for some US taxpayers, state income taxes don’t exist. For expats, this is great news, because it means it doesn’t matter if you’re a resident of the state and receiving income generated in that state won’t be subject to state tax for expats. It’s important to note that despite the fact they don’t have income tax, these states still get their revenue through other sources, like property tax and sales tax. These states are:
- South Dakota
- Washington State
Also note, New Hampshire and Tennessee only assess income tax on dividend and interest income.
Not sure if you need to file State Tax Returns as an expat? 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.
Which States Require Expats to File Income Taxes?
Generally, most states only require you to file a state tax return if you lived in the state during the year and usually only tax income generated within the state (click here for links to the specific state website to learn more). Sometimes, income from sources received while living abroad may be taxed in the state, such as retirement payments or investment income (interest and dividends). Be mindful of state sourced income when planning your tax for expats, since that income could create a tax-filing requirement for you.
There are, however, four states with less clear rules – these are called “sticky” states because the requirements for filing a state tax return as an expat can be complicated and small nuances related to ending your formal residency can lead to a filing requirement. California, South Carolina, New Mexico and Virginia 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 ID card
- Bank accounts or investment accounts held in the state
- Voter registration (even absentee ballots)
- Mailing address in the state (P.O. box or a relative’s house)
- Dependents remaining in the state (spouse or children)
All four of these states have very stringent residency definitions in comparison with other states and they tax worldwide income. You would need to report all income on your state tax return and pay taxes to the state, even if you didn’t live in the state during the year! Learn more about these sticky states here.
These four places consider moving abroad as a temporary leave of absence unless you can remove your ties to the state. That’s why it’s critical to properly sever ties before moving abroad, since these states only recognize a change to another state (not another country) as a change in residency. Things like closing or moving bank accounts, selling property and changing driver’s licenses to another state can help ensure you won’t end up paying state tax for expats on your income in these sticky states. There are certainly benefits of maintaining things like a US bank account when moving abroad, so moving it to a different state can help you avoid paying state taxes while enjoying the benefits of keeping a US bank account.
As you can see, state tax planning can be complicated, so taking necessary precautions before moving abroad is important. Doing things like making state residency changes, moving your whole family with you and cutting as many ties to your state as possible are all ways to help prevent the need to file state taxes while living abroad. Because state taxes for expats can be complex, it’s a good idea to consult with an expat tax professional to get the expatriate tax assistance you need for determining your requirements. For more expat tax tips and advice, download our tax guide for Americans working overseas.
Still have questions about filing a State Tax Return?
Our expat-expert CPAs and IRS Enrolled Agents can provide the advice you need in order to become and stay compliant on your expat tax obligations. Contact us today for help understanding your state tax requirements.