Do I Need to File State Taxes If I Live Abroad?
- Do US Expats Pay State Taxes?
- 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
- How to Avoid State Taxes While Living Abroad
- Moving Abroad? Plan Ahead for Your State Taxes
- What If I’m Behind in My Taxes?
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.
Do US Expats Pay State Taxes?
The answer is yes— If you’re living abroad, you might not realize that you’re still considered a resident of your home state and are subject to paying state taxes. This includes income tax, property tax, and sales tax.
The first thing to understand is that most states in the US have a reciprocity tax treaty with other countries. This means that if your home state has a reciprocal agreement with your new country of residence, all of your home state’s income tax obligations are transferred to your new state of residence. For example, if you lived in Florida but moved to Canada, all of your income tax obligations would be transferred over to Canada.
If your home state does not have a reciprocal agreement with your new country of residence, then there are still ways for you to avoid paying double taxation on any income earned abroad. You can do this by applying for an exemption certificate from the IRS through the FBAR system (Foreign Bank Account Report).
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 the state you lived in previously and if you still have ties to that state. But, you may not need to file a state tax if you live abroad. In fact, some states don’t levy state income taxes at all.
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 if any of the following are true:
- You lived in the state at any point during the tax year
- Your immediate family lives in the state while you’re overseas
- You return to the state each time you return to the US to live
- You maintain an abode in the state (a permanent place of residence)
- You keep your driver’s license or ID card, or voting rights 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. 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. 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 tax income generated within a state is taxable. View your state’s government website to learn more.
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.
“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 having any of the following:
- Property in the state
- A state driver’s license or ID card
- Bank accounts or investment accounts held in the state
- Voter registration (even absentee ballots)
- Mailing address in the state (even if this address is a P.O. box or a relative’s home)
- Dependents remaining 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 most 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.
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
- 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 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.
Moving Abroad? Plan Ahead for Your State Taxes
If you are planning to move abroad, it’s essential to plan ahead for your state tax obligations. State tax laws vary widely, and failing to address your state tax situation properly can result in unexpected tax bills and penalties.
One critical factor to consider is your state residency status. Depending on the state, you may need to take specific steps to change your residency status, such as obtaining a driver’s license or registering to vote in your new country of residence. Failing to do so can result in your home state continuing to consider you a resident and subjecting you to state income taxes.
Another consideration is your family situation. If you have family members who remain in your home state, you may still be considered a resident for tax purposes, even if you are living abroad. It’s essential to understand the rules governing residency and to take steps to ensure that you are in compliance.
Cutting ties to your home state as much as possible can also help prevent the need to file state taxes while living abroad. This can include selling your home, closing bank accounts, and canceling memberships to clubs or organizations that tie you to your state.
What If I’m Behind in My Taxes?
If you weren’t aware that you were required to file state taxes as an expat, don’t panic. You’re not alone. Many Americans living overseas are unaware that they have any US tax obligations at all. (After all, the US is one of the only three countries in the world that taxes citizens regardless of where they live—the others being Eritrea and North Korea.)
To help reduce the tax penalties for expats, the IRS provides an amnesty program you can use to get caught up on your taxes: the Streamlined Filing Compliance Procedures. Unfortunately, this program won’t protect you from penalties accrued due to delinquent state taxes. However, it can erase any penalties for failing to file your federal returns—which are likely to be much higher, anyway.
To use the Streamlined Filing Compliance Procedures, all you have to do is:
- Self-certify that your failure to file was an accident, not a willful refusal
- File the last three delinquent income tax returns and pay any delinquent taxes you owed during that time (with interest)
- File Foreign Bank Account Reports (FBARs) for the last six years
This will bring you into compliance with IRS regulations.
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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