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 filing state tax for expats living abroad.
Do I Need to File State Taxes If I Live Abroad?
Whether or not you will need to file state taxes while living abroad depends on the state you lived in and if you still have ties to the state. If you are planning a move abroad, this guide will help you make smart tax decisions in advance of your transition out of the US. If you’ve already moved abroad, this guide will help you know what filing requirements you face and make decisions about cutting ties to avoid more tax obligations.
In some cases, you won’t need to file state tax for expats if you’re living abroad. In fact, some states don’t levy state income taxes at all.
Here’s how to know if you need to file state taxes while living abroad:
1. Determine if you’re a resident of the state for tax purposes.
If you meet the following criteria, you likely be considered to have state residency while living abroad:
- 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 living abroad, 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.
Currently, these states do not tax wages:
- South Dakota
- Washington State
Additionally, these states only assess income tax on dividend and interest income:
- New Hampshire
Which States Require Americans Living Abroad 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 (view your state’s government 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.
Some States Make It Tough to Get Out of Taxes Abroad
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:
- South Carolina
- New Mexico
In sticky states, small nuances related to ending your formal residency can lead to a filing requirement. Specifically, these states 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.
How to Avoid States Taxes While Living Abroad
To avoid paying state income taxes while living overseas, you’ll want to abandon residence in any state that levies income taxes and establish a new residence in a state without income tax.
Keep in mind that sticky states consider moving abroad as a temporary leave of absence unless you can remove your ties to the state. These states only recognize a change to another state (not another country) as a change in residency. That’s why it’s critical to properly sever ties and set up new residency in an income tax-free state before moving abroad.
While each state is unique, taking the actions below can help ensure you won’t end up paying state taxes for expats when living abroad.
1. Establish Domicile in an Income Tax-Free State
Domicile is a tax term that means your permanent and true home. You can only have one domicile at a time. Furthermore, your domicile will remain in place until you’ve established a new domicile elsewhere, which is why abandoning the status of a state residency while living abroad can be so tricky.
Establishing permanent ties in your new resident state (and country) will point to your status of having a new domicile. This includes:
- The location, use (rented versus owned), and size of your residence in each location, if you have more than one
- Where you spend your time
- Your occupation/where you work
- Where you keep your most valued items like safety deposit boxes, bank accounts, auto registrations, and more
- How active you are in a local business
- Where your family lives, the location of the children’s school, and social, community, and religious ties
- Other elements that may indicate your future intention
2. Cut All Possible Ties to the State Residency You Want to Abandon
If you have any intention to return to your state home, it may still be considered your domicile. So you must cut as many ties as possible by doing the following:
- Sell your old home and purchase, or lease new residence
- Get an identification card in your new state and/or country
- Move your family abroad, too
- Join associations (business, social or otherwise) in your new state and abroad
- Find medical and financial professionals in your resident country
- Close bank accounts with your home state, open a foreign bank account
- Register to vote in your new state as an absentee voter
- Sell your automobile or change your auto registration
There are certainly benefits of keeping a US bank account, state voter registration, and more when moving abroad. So moving to a different state before going abroad can help you avoid paying state taxes while enjoying these perks.
Moving Abroad? Plan Ahead for Your State Taxes
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 free tax guide: Everything American Expats Need to Know About US State Taxes.
Still Have Questions about Filing State Taxes from Abroad?
If you’re not sure if you need to file State Tax Returns as an expat, don’t worry! Our expat-expert CPAs and IRS Enrolled Agents can provide the advice you need. Contact us today for help understanding your state tax requirements.