As a US expat, you’re probably well aware of your annual expatriate tax filing requirements. You may not be as familiar with the requirement for some expats to file state returns as well. If you thought federal expat taxes were tricky, well, the intricacies of state taxation can be even more complex! After all, state taxes vary by state – some don’t have state income taxes, some don’t require expats to file and some require everyone, including expats, to file. Determining whether you need to file can be a bit complicated, but we’re here to help make it easier!
Do I Have to File State Returns?
Some states actually don’t have income taxes, which makes things even easier on you as a US expat! These states get their revenue from other sources, like property tax and sales tax. If you live in one of the following states, do you have to file state returns? That’s a “no” to the following:
- South Dakota
New Hampshire and Tennessee only require income tax on dividend and interest income, so your tax filing requirements are simpler in those states, also.
Which States to File Returns: “Sticky” States are Tricky
On the opposite end of the spectrum, a number of states have nitpicky requirements that can make the tax process a bit more complicated when looking at which states to file returns; these states are referred to as sticky states. Sticky states make ending your formal residency a challenge, and often consider you a resident even if you move away permanently. Sticky states also consider moving abroad a temporary leave of absence unless you can remove the following ties you have to the state:
- Property ownership
- State driver’s license or ID card
- Bank accounts or investment accounts in the state
- Voter registration, even absentee ballots
- Mailing address in the state, whether it’s a PO Box or a family member’s home
- Dependents living in the state, including spouse or children
States that are considered sticky include California, South Carolina, New Mexico, and Virginia. They have the most rigid residency definitions and will tax your worldwide income. This means if you have any of the ties mentioned above, you need to report all of your income on your state tax return and pay taxes to the state, even if you haven’t lived there during the year.
In general, if you really want to avoid having to file a state return, you’ll need to be sure you sever any and all ties you have to the state before you move abroad because sticky states only recognize a change to another US state as a change in residency. Closing or moving your bank account to a different state, selling your property, and changing your driver’s license to another state (especially one without income tax!) can help ensure you won’t end up paying state taxes on your income in these states.
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.
Still 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.
State Filing Requirements for Other State Returns for Expats
While some states are more complicated, other state returns for expats are pretty simple when it comes to state filing requirements , and many only require you to file a state return if you lived in that state during the year. These states typically tax income that is generated or earned in the state, and they may tax income received while living abroad, such as from retirement payments and investments (interest and dividends).
How to File a State Return as an Expat
If you find that you must file a state return while living overseas, a few considerations must be made.
- Determine if you’re a resident of the state or if the state considers you a resident for tax purposes. If you meet any of the following, most states will consider you a resident:
- If you lived in the state at any point during the year
- If your immediate family (spouse and dependent children) lives in the state while you’re abroad
- If you return to the state each time you return to the US to live
- If you maintain an abode (permanent residence) in the state
- If you keep a driver’s license, ID card, or voting rights in the state
- Figure out if you have income from the state, which is defined as:
- Income earned from working in the state, usually before or after moving abroad is almost always taxable in the state.
- Income generated from a state source, like pension/retirement income or government benefits may be taxable if you’re considered a resident.
Note: Residency requirements are determined by each state, but most will consider you a non-resident if you’ve lived outside the state for more than half the year.
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!
Have Questions About State Tax Returns While Living Abroad?
Greenback can help! Our dedicated team of expat tax professionals can help you navigate the intricacies of US expat taxes and state returns. Contact us today!
Originally published in 2016; updated January 15, 2021.