Do states follow the Foreign Earned Income Exclusion on state tax returns?

Most states with an income tax follow the Foreign Earned Income Exclusion because they base their own calculations on federal adjusted gross income, and the exclusion is already subtracted from that figure. Four states do not: California, Massachusetts, New Jersey, and Pennsylvania.

How the four exceptions work

None of the four gives a credit for income tax paid to a foreign country, so there is no state-level offset for the tax you already paid abroad. New Jersey and Pennsylvania say so directly in their own instructions, and Massachusetts extends its credit only to other U.S. jurisdictions and to Canada.

States that follow it

Every other state has an income tax, including New York, Virginia, North Carolina, Georgia, and Oregon. Alabama, Hawaii, and Mississippi are sometimes listed as exceptions, but they do not belong there. Alabama exempts income excluded under Section 911 by statute; Mississippi allows the same amount as a deduction on Schedule N, with Form 2555 attached; and Hawaii starts from federal AGI with no add-back.

States with no income tax at all

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The question does not arise in any of them.

What this means for you

If you live in one of the four, the exclusion protects your federal return and does nothing for the state one, so a full federal exclusion can still leave the whole salary taxable at the state level. Everywhere else, what decides your exposure is residency, not the exclusion. Establishing domicile outside a sticky state before you leave is what settles it, and our guide to state taxes for expats covers how each state tests that.