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Expat Tax Essentials
All US citizens are required to file a federal tax return every year, no matter where they live. In addition to this, some expats also have to file state taxes. Fortunately, you can change your state residency to avoid this—even while living abroad. Here’s how.
In many cases, expats are required to file a tax return with the state they lived in before moving abroad. However, every state has its own laws surrounding this issue. Depending on which state you used to call home, you may be exempt.
The key to answering this is knowing whether you are still considered a resident of a state—and if so, which one. If you are a resident for tax purposes, that state will typically be able to impose an income tax on you. Usually, you will be considered a resident if you lived in a given state for more than half of the year.
A state may also consider you a resident if:
So-called “sticky states” are notorious for using even the slightest justification to tax former residents. These states include:
On the other hand, some states have no income tax. Even if you are a resident of these states, you will not be required to file a tax return. Currently, the following states are tax-free:
(Additionally, Tennessee and New Hampshire only assess income tax on dividends and interest income.)
So, to determine if you are required to file a state tax return, you need to answer these questions:
If the answer to both is yes, you are likely required to file a return.
If you have earned income derived from work done in a given state, you will generally have to report that income regardless of whether you are a resident.
To change your state residence while living abroad, you will need to complete the following two steps:
Let’s take a closer look at each step.
Terminating your state residency could be a simple or complicated process, depending on which state you’re leaving. For some states, it’s as easy as living abroad for at least half of the year. Others will require more effort to cut ties completely. You may have to:
Review the residency regulations for your former state to learn what steps you will need to take.
If you’ve successfully terminated your residence in your former state, you can technically stop there. This would mean you will not be considered a resident of any US state. However, that isn’t always an option. Some states won’t allow you to terminate your residency until you’ve established residency in a new state—even if you live outside the US. Plus, there are benefits to maintaining state residency somewhere, even while living abroad.
If you choose to establish residency in a new state, you will start by picking the state. It generally makes the most sense to pick a tax-free state. That way, you can enjoy all the benefits of state residency without having to worry about any state tax obligations.
Once you know where you want to establish residency, review the requirements to be considered a resident in that state. This may include:
Of course, some of these are impossible to do from overseas. This often makes it wise to move your residency to a new state before moving abroad. If you’ve already moved overseas, you may still be able to move your state residency. Consult an expat tax professional to learn more about your options.
If you didn’t know you were required to file US taxes as an expat, you’re not alone. Many expats are unaware of this requirement. (After all, the US is one of only two countries in the world that taxes citizens regardless of where they live—the other being Eritrea.)
If you’re behind on filing your state taxes, the only solution is to file your delinquent returns and come into compliance. Unfortunately, you may have to pay interest and even penalties based on any taxes you owed.
The good news is that if you’re also behind on filing your federal taxes, you can catch up without facing any penalties. The IRS offers an amnesty program called the Streamlined Filing Compliance Procedures. By using this program, you can erase any fines you might have accrued by failing to file a federal tax return when required. (These penalties are likely to be much higher than for your state taxes anyway.)
To use the Streamlined Filing Compliance Procedures, all you have to do is:
This will bring you into compliance with IRS regulations.
We recommend always consulting a qualified tax professional to assist with this process rather than attempting it on your own. Even a minor mistake when getting caught up on your taxes could be costly.
We hope this guide has helped you understand how to change your state residency while living abroad. However, US tax law can be complicated for anyone—and doubly so for Americans living abroad.
Filing expat taxes doesn’t have to be a hassle. Start your filing process with Greenback today.