How to Change Your State Residency While Living Abroad
All US citizens who meet the filing threshold 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.
Surprised? You’re not alone, many of our customers at Greenback Expat Tax Services were surprised too, and came to us for help. The good news is it’s very difficult to surprise our CPAs and Enrolled Agents who are expats themselves, living in 14 time zones, and all of whom have specialized knowledge of US expat tax laws.
That’s how we know you can change your state of residence to avoid this—even while living abroad. In this article, we’ll discuss how to change your residency status while living abroad as well as how to file US state taxes while overseas.
Key Takeaways
- Most states require residents to file an annual state tax return.
- Some expats may be able to transfer their residency to a tax-free state or terminate their state residency entirely to avoid paying state taxes.
- Some states make it harder than others to change your tax residency status while living abroad.
How to Determine State Residency while living abroad?
In many cases, expats are required to file an income tax return with the last state they lived in before moving abroad. However, every state has its own laws surrounding this issue. Depending on which one used to be your home state, 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:
- You own a home there
- Your spouse and/or children live there
- You have a driver’s license or ID card from that state
- You’re registered to vote there
- Your vehicle registration is there
- You maintain a bank account there
- You maintain a mailing address there
So-called “sticky states” are notorious for using even the slightest justification to tax former residents. These states include:
- California
- South Carolina
- New Mexico
- Virginia
- New York
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:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
(Additionally, Tennessee and New Hampshire only assess income tax on dividends and interest income.)
To determine whether you are required to file a state tax return, answer these questions:
- Do you meet the residency requirements of any state?
- Does that state impose an income tax?
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 or a nonresident. Earned income includes any salaries, wages, bonuses, self-employment income, and similar pay earned while physically in a state during the tax year.
How to Change Your State Residency While Living Abroad
To change your state residence while living abroad, you will need to complete the following two steps:
- Terminate your residency in your former state
- Establish new residency in a new state
Let’s take a closer look at each step.
1. Terminate Your State Residency
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 the year. Others will require more effort to cut ties completely. You may have to:
- Sell any property you own in that state
- Close your financial accounts in that state (e.g., bank accounts or credit cards)
- Move your driver’s license or state ID to a new state
- Move your voter registration to a new state
- Sell your vehicle or change your auto registration to a new state
- Move your immediate family out of the state
- Leave any local associations, such as social clubs or business organizations
- Remove any local mailing addresses you have
Review the residency regulations for your former state to learn what steps you will need to take.
2. Establish Residency in a New State
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 have a new permanent home in a foreign country 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:
- Purchasing property in that state
- Registering a vehicle in that state
- Applying for a state driver’s license or ID card
- Opening a local financial account
- Joining local associations
- Seeing a local doctor
- Working within the state’s borders
- Becoming active in the local community
Establishing a domicile in a tax-free state can help simplify your tax obligations while ensuring you have a recognized permanent residence. 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 a US expat tax professional to learn more about your options.
If you’re behind on your US taxes, you may qualify for a special compliance program to get back on track without penalties. Download our Streamlined Filing Eligibility guide to understand if you qualify.
What If I’m Behind in My State Taxes?
If you are behind on your State income taxes, you should speak to a tax professional to determine exactly what tax implications are needed to comply as a taxpayer with the relevant state. Each state has its own tax rules when it comes time to pay taxes, so this would need to be looked at individually to determine the best course of action.
We recommend always consulting qualified tax professionals like Greenback Expat Tax Services 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.
Still Have Questions Regarding Your State Residency? We Have Answers!
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.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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