Do I Have to Pay State Taxes While Living Abroad?
- The Three Scenarios Where Expats Owe State Taxes
- The Nine Tax-Free States: Your Best Option
- The Five "Sticky States" That Aggressively Pursue Expats
- The Hidden Tax Trap: State-Sourced Income
- Common Mistakes That Cost Expats Money
- How Federal Tax Benefits Don't Protect You from State Taxes
- State Tax Planning Strategies
- When Professional Help Pays for Itself
- Special State Tax Situations
- Your State Tax Compliance Checklist
- Looking Ahead: State Tax Trends
- Your Next Steps to Get State Tax Compliant
It depends on your former state and whether you’ve properly severed ties. According to the Federation of Tax Administrators, 41 states and Washington, DC, levy income taxes on residents, but here’s the relief many expats don’t realize: you can legally eliminate state tax obligations by changing your residency status.
If you previously lived in one of the nine states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming), you won’t owe state taxes regardless of your expat status. For everyone else, your obligations depend on whether your former state still considers you a resident and whether you maintain income sources in that state.
This guide explains exactly when you owe state taxes, which states make it nearly impossible to leave, and the specific steps to eliminate your state tax obligations.
The Three Scenarios Where Expats Owe State Taxes
Most expats fit into one of three situations when it comes to state taxes:
Scenario 1: Your Former State Still Considers You a Resident
If you’re still a state resident for tax purposes, you’ll owe taxes on your worldwide income, including all your foreign earnings. This happens when you haven’t properly severed ties or lived in a “sticky state” that fights to keep you on the tax rolls.
Your former state likely still considers you a resident if you:
- Maintain a driver’s license or state ID from that state
- Own property there (even rental or investment property)
- Have dependents (spouse or children) living in the state
- Use a relative’s address for mail or banking
- Stay registered to vote (even for absentee voting)
- Keep bank accounts or business connections there
- Hold professional licenses in the state
The burden of proof is on you. Simply moving abroad doesn’t automatically end your residency. Many expats assume living overseas for several years means they’re no longer residents, only to receive audit notices demanding back taxes on their foreign income.
Scenario 2: You Have State-Sourced Income
Even if you successfully terminated residency, you may still owe taxes on income earned within a state. This applies to non-residents who maintain economic ties to their former state.
Common state-sourced income includes:
- Rental property income (even if managed by a property management company)
- Business income from operations in the state
- Partnership or LLC distributions from state-based entities
- Capital gains from selling state property
- Some retirement payments (varies by state)
What doesn’t count as state-sourced income:
- Wages earned while working overseas
- Foreign investment income
- Foreign business income
- Foreign rental property income
For non-residents, Social Security benefits, federal pensions, and investment income from stocks and bonds are generally exempt in most states.
Scenario 3: Part-Year Residency
If you moved abroad mid-year, you’ll file as a part-year resident, reporting worldwide income for the portion of the year you lived in the state and only state-sourced income afterward. Learn more about the complexities of mid-year moves.
Not Sure if You Owe State Taxes? Get Help from an Expert
The Nine Tax-Free States: Your Best Option
If you lived in any of these states before moving abroad, you have no state income tax obligations:
Fully income tax-free states:
- Alaska
- Florida
- Nevada
- New Hampshire (fully tax-free as of January 1, 2025)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire eliminated its final tax on dividends and interest effective January 1, 2025, making it fully income-tax-free. Washington has no personal income tax on wages but does levy a 7% capital gains tax on high earners (gains exceeding $270,000 annually).
These states rely on property taxes, sales taxes, and other revenue sources that typically don’t affect Americans living abroad. Establishing residency in one of these states before or after moving abroad can eliminate state tax obligations entirely.
The Five “Sticky States” That Aggressively Pursue Expats
Five states have earned notorious reputations for making it extremely difficult to terminate residency and actively auditing expats years after they’ve moved abroad:
California: The Most Aggressive
California’s Franchise Tax Board actively audits expats and uses sophisticated methods to maintain tax jurisdiction. They’re particularly focused on high earners and will challenge residency changes years after the fact.
California’s residency traps include property ownership (even investment property), business interests or professional licenses, family members remaining in the state, and maintaining any California financial accounts. California also distinguishes between “residence” and “domicile,” creating complex rules that can tax you even with minimal California connections.
Read our detailed guides on California state taxes for expats and California domicile vs. residence.
New York: Strict Domicile Rules
New York distinguishes between residency and domicile, making it possible to be taxed even if you spend minimal time in the state. They focus heavily on your “intent” to return and look at factors like maintaining a “permanent place of abode,” near and dear items (family heirlooms, artwork), and social and business connections.
Virginia: The “Temporary” Assumption
Virginia often considers overseas moves “temporary” unless you provide substantial evidence proving your move is permanent. They require extensive documentation and may audit years later. Learn more about Virginia state residency requirements.
South Carolina: Documentation Requirements
South Carolina requires extensive documentation to prove non-residency and may challenge claims years after the fact. See our guide on South Carolina residency determination.
New Mexico: Complex Tie-Breaking Rules
New Mexico uses complex formulas to determine residency when you have connections to multiple states, making it challenging to prove you’ve truly severed ties.
The Hidden Tax Trap: State-Sourced Income
Many expats assume living abroad eliminates all state tax obligations. That’s not true if you maintain income-producing assets in the United States.
Real-world example: Mark moved from New York to Singapore but kept his Manhattan rental property. He didn’t file New York non-resident returns for three years, assuming his move abroad ended all New York obligations. New York eventually found him and demanded three years of back taxes, plus penalties and interest on the unreported rental income. His mistake cost him over $18,000 in penalties alone.
Even as a non-resident, you must file state returns reporting:
- Rental property income (even if professionally managed)
- Capital gains from selling state property
- Business income from state operations
- Certain partnership or LLC distributions
- Royalties from intellectual property registered in the state
Common Mistakes That Cost Expats Money
Mistake 1: The “Clean Break” Assumption
Many expats assume moving abroad automatically ends state tax obligations. California audits prove otherwise.
Jennifer moved from California to London for work, assuming her obligations ended. Two years later, California audited her and demanded taxes on her UK salary because she maintained a California driver’s license and bank account. Her oversight cost her $31,000 in back taxes plus penalties.
Mistake 2: Partial Tie-Severing
Sarah moved from Virginia to Germany but kept her Virginia driver’s license “for convenience.” Virginia continued taxing her worldwide income, including her German salary. Maintaining even one significant connection can preserve tax residency.
Mistake 3: Poor Documentation
The burden of proof is on you. States can audit years later, and you must prove you severed ties. Keep detailed records of your move abroad, all tie-severing actions with dates, proof of foreign residence establishment, and evidence of minimal time spent in your former state.
How Federal Tax Benefits Don’t Protect You from State Taxes
Your federal expat tax benefits don’t automatically protect you from state taxes, which catches many expats by surprise.
Foreign Earned Income Exclusion (FEIE):
- Federal benefit: Exclude up to $130,000 of foreign earned income (2025 tax year)
- State impact: Most states don’t recognize the FEIE and tax the full amount
Foreign Tax Credit (FTC):
- Federal benefit: Dollar-for-dollar credit for foreign taxes paid
- State impact: Few states offer similar credits for foreign taxes
This means that even if you owe $0 in federal taxes due to the FEIE, you may still owe thousands to your former state on the same income.
Real-world example: Sarah earns $85,000 in Australia and pays $25,000 in Australian taxes. For federal purposes, she excludes her entire salary using the FEIE and owes $0. But if Virginia still considers her a resident, she owes Virginia tax on the full $85,000 with no credit for Australian taxes paid. Her Virginia liability: approximately $4,250 annually. This is why establishing non-resident status is critical.
State Tax Planning Strategies
Before Moving Abroad (The Best Time to Act):
- Research your state’s residency rules thoroughly
- Consider establishing residency in a tax-free state before moving
- Plan the timing of your move to minimize part-year residency complications
- Restructure income sources to reduce state-sourced income
- Document everything meticulously
After Moving Abroad (Damage Control):
- Audit your current residency status immediately
- Identify and sever any remaining ties to former states
- Review all income sources for state tax implications
- Establish clear foreign residency documentation
- File any missing state returns to get the current
Learn the specific steps in our guide on changing state residency while living abroad.
Ongoing Compliance:
- Monitor state law changes annually
- Keep detailed records of your foreign residence
- Review whether you need to file any state returns
- Stay informed about your former state’s enforcement activities
When Professional Help Pays for Itself
State tax rules are complex and subject to frequent changes. Professional assistance is particularly valuable if you:
- Lived in a sticky state (California, New York, Virginia, South Carolina, New Mexico)
- Have significant state-sourced income
- Need to file returns in multiple states
- Face an audit or enforcement action from a state
- Want to establish new state residency strategically
- Have been non-compliant and need to catch up
If you’re behind on state filing, you may qualify for the Streamlined Filing Procedures to catch up on federal returns, which often provides a foundation for resolving state compliance as well.
Special State Tax Situations
- Multiple State Complications: Some expats must navigate multiple state tax systems if they worked in one state while living in another, moved between states before going abroad, or have income sources in more than one state.
- Military Personnel: Military members have special protections under the Military Spouses Residency Relief Act; however, these protections don’t always extend to civilian expatriates.
- Students Abroad: Students may maintain residency in their home state, especially if they plan to return after graduation. If you’re returning to the US after studying abroad, strategic state planning matters.
Your State Tax Compliance Checklist
Annual Review Process:
- Determine residency status – Review ties to all potential resident states and confirm you’ve maintained non-resident status
- Identify income sources – List all US-sourced income by state and check for any overlooked income sources
- Determine filing requirements – Research filing thresholds for each relevant state and note filing deadlines (often different from federal)
- File required returns – Gather documentation, complete all required returns, and pay any taxes owed by the deadline
Documentation to Maintain:
- Proof of foreign residence establishment
- Records of all tie-severing actions
- Documentation of time spent in each state
- Income source documentation
- Professional license and membership changes
Looking Ahead: State Tax Trends
States are becoming more aggressive in pursuing expat taxes due to budget pressures and improved technology for tracking taxpayers. They’re using data analytics to identify non-compliant expats by matching federal tax returns with missing state returns. Interstate cooperation is increasing, making it harder to fly under the radar.
Some states are considering or have passed laws specifically targeting expats, making residency termination more difficult. The cost of non-compliance is rising faster than the cost of professional help.
Your Next Steps to Get State Tax Compliant
If you’re planning to move abroad:
- Research your state’s residency rules now
- Develop a comprehensive tie-severing strategy
- Consider establishing residency in a tax-free state before moving
- Document everything meticulously
- Consult professionals before making the move
If you’re already abroad:
- Audit your state residency status immediately
- Identify any state-sourced income you may have overlooked
- Review your compliance history and catch up if necessary
- Plan future financial moves to minimize state tax complications
- Stay informed about changes in relevant state laws
Red flag situations requiring immediate attention:
- You haven’t filed state returns since moving abroad
- You maintain significant ties to a sticky state
- You have unreported state-sourced income
- You’ve received correspondence from state tax authorities
If you’re ready to be matched with a Greenback accountant who can help with your state and federal tax obligations, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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This article is for informational purposes only and should not be considered tax advice. State tax laws are complex and subject to frequent changes. Always consult with a qualified tax professional about your specific situation.
