State Taxes for Americans Abroad: Filing Requirements & More
- Do I Need to File State Taxes If I Live Abroad?
- Which States Are Income Tax-Free?
- Which States Require Americans Living Abroad to File Income Taxes?
- “Sticky States” Make It Tough to Get Out of State Taxes Abroad
- Filing Multiple State Tax Returns
- How to Avoid State Taxes While Living Abroad
- Still, Have Questions about Filing State Taxes from Abroad?
You may already know that all US citizens must file a federal tax return each year regardless of where they live. However, there is an equally important requirement for some expats that can easily be overlooked: filing state taxes.
Do you have to file state taxes if you live abroad? That depends on a few factors.
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.
Let’s get started!
- Some US expats are required to pay state taxes even after moving overseas, depending on the state where the expat has residency.
- Taxpayers can change or terminate their state residency to erase their state tax obligations.
- Certain states make it much harder for expats to change their residency status than others.
- In some cases, expats may need to file multiple state tax returns in a single year.
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 which state you lived in and if you still have ties to that state. Some expats have to file state taxes from overseas, while others are exempt. Here’s how to know if you must file state taxes while living abroad:
1. Determine If You’re a Resident of the State for Tax Purposes
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. In addition to this, you may be considered a resident of a state if any of the following are true:
- You lived there at any point during the tax year
- Your immediate family lives there while you’re overseas
- You return there each time you return to the US to live
- You maintain an abode there (a permanent place of residence)
- You have a state-issued driver’s license
- You are registered to vote there
- You own a home in the state
If you are considered a resident of a given state, you will generally have to file a state tax return. Of course, there are exceptions, such as in states with no income tax. (More on this below.)
2. Determine If You Have Income in the State
If you have income earned from working in a state, you will generally have to report that income and pay taxes on it regardless of whether you are a resident. The most common forms of income earned in a state includes time you spent there while working, owning property in the state that you rent to others, and owning a business located in the state. Some forms of income, such as a pension or government benefits, may only be taxed if you’re a state resident.
Which States Are Income Tax-Free?
Not all states have an income tax. Some are tax free. If you were formerly a resident of one of these states, it won’t matter whether you’re a resident or have an income at all—you won’t be taxed either way. These states will still have some form of taxation, such as a property tax or sales tax, but these usually won’t apply to Americans living abroad.
Currently, the following states have no income tax:
- South Dakota
- Washington State
Additionally, Tennessee and New Hampshire only assess income tax on dividends and interest income.
Which States Require Americans Living Abroad to File Income Taxes?
Typically, most states only require you to file a state tax return if you lived in the state during the year. However, a filing requirement doesn’t necessarily mean you will have to pay a tax debt. Usually, only income generated within a state is taxable.
However, there are exceptions to this. 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.
To learn more about your tax obligations, visit your state’s official website. The IRS provides a handy list here.
“Sticky States” Make It Tough to Get Out of State Taxes Abroad
There are five states with less clear rules when it comes to taxation. These are called sticky states because they make it harder than usual for residents to change their residency status. For example, sticky states may consider you a resident for simply maintaining the following in that state:
- A state driver’s license or ID card
- Bank accounts or investment accounts
- Voter registration (even absentee ballots)
- Mailing address (even if this address is a P.O. box or a relative’s home)
- Dependents living in the state, such as a spouse or children
The five states most commonly considered sticky states are:
- South Carolina
- New Mexico
- New York
All four of these states have very stringent residency definitions compared to other states, and they tax worldwide income. In certain cases, 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.
Filing Multiple State Tax Returns
Some expats have ties to more than one state, requiring them to file multiple state tax returns. Let’s look at some key considerations for this.
Why Expats May Need to File Multiple State Tax Returns
Typically, there are two primary reasons you might have to file multiple state tax returns.
- Residency in multiple states: If you lived in more than one state during a single tax year, you might have to file state tax returns in each.
- Income from multiple states: If you earned income from multiple states, you may need to file state tax returns with them all. This will depend on the income filing threshold for each state as well as other factors.
Key Considerations for Filing Multiple State Tax Returns
- State tax reciprocity agreements: Check if there are reciprocity agreements between the states you have ties to. These agreements simplify the filing process, allowing you to pay taxes in only one state of residence. That way, you could avoid filing multiple state tax returns.
- Tax credits and deductions: Each state may offer its own set of credits and deductions. For example, some states offer credits for taxes paid to another state, while others provide deductions for specific types of out-of-state income. See what options are available for you. This can help you avoid double taxation.
- Expert assistance: Filing multiple state tax returns can get complicated fast. Consider consulting with an expat tax professional with experience handling multi-state taxation to ensure accurate and compliant filings based on your specific circumstances.
As an American living abroad, it’s crucial to always maintain detailed records of your worldwide income, expenses, and all other relevant documentation. This will simplify the tax filing process, help you claim applicable tax deductions, and provide evidence in case of any inquiry by tax authorities.
How to Avoid State Taxes While Living Abroad
Depending on what state you formerly resided in, you may not have too much trouble removing your state tax obligations—if you have any at all. For example, if you are moving out of a tax-free state, you won’t have to expect any tax liability at all.
Even if your former state does tax income, you can still erase your state tax obligations. Here are a couple of ways in which you may be able to remove your state tax obligations:
1. Terminate Your State Residency
The first option for removing your state tax burden is to terminate your residency in the state you formerly lived in. While the residency laws of each state are unique, taking the actions below can help ensure you won’t end up paying state taxes for expats when living abroad.
- Sell your old home and purchase (or lease) a new residence somewhere else
- Close your US financial accounts and open new ones overseas
- Get an identification card in your country of residence
- Move your family abroad with you if possible
- Join local associations (e.g., business or social clubs)
- Find a new family doctor to see regularly in your new home country
- Register to vote as an absentee voter
- Sell your car or change your auto registration
2. Establish Residence in an Income Tax-Free State
There are a few situations where it might be better to transfer residence to another US state rather than sever your ties to the US completely. For example, if you live in a sticky state, you might find it easier to establish residency in a different state before moving abroad.
Sticky states generally consider moving abroad as a temporary leave of absence unless you can remove your ties to the state. These states only easily recognize a change to another state (not another country) as a change in residency. This makes it critical to set up new residency in an income-tax-free state before moving abroad.
Plus, there are benefits to keeping a US bank account, state voter registration, and more when moving abroad. By moving to a tax-free state, you can enjoy those perks while still removing your state tax obligations.
The rules for establishing residence in a new state are similar to establishing residence in a new country. This will revolve around:
- Where you own or rent your home
- Where you work
- Where you spend most of your time
- Where your family lives
- Where your family doctor is located
- Where you open your financial accounts
- Where you maintain social and professional ties
- Where you are most active in the local community
By moving the most important aspects of your life to a new state, you can establish residency there. Then, you can choose to either maintain that residency while living abroad or terminate it later on.
Still, Have Questions about Filing State Taxes from Abroad?
Hopefully, this guide has helped you understand whether you must file state taxes while living abroad.
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