"A fine is a tax for doing something wrong. A tax is a fine for doing something right." - Anonymous
Expats have to file US federal taxes from overseas, but what about state taxes? The answer isn’t a straight yes or no unfortunately, as it depends on several factors that we’ll explore in this article, but state taxes should be part of your research as you plan your move abroad.
In this article, you’ll learn about:
• Which expats have to file state taxes?
• How is state residency defined for expats?
• States where it doesn’t matter
• States where you’ll need to do something
• Sticky States
• Preparing to minimize state taxes when you move abroad
Which expats have to file state taxes?
Whether or not you are required to file state taxes as an expat depends on in which state you resided permanently before moving abroad. To put it another way, the rules of the state that you were considered a resident of will decide your obligations regarding state taxes once you live overseas. If that state still considers you as a resident, then you have to file state taxes from abroad.
But how will you check your residency status according to your last state?
How is state residency defined for expats?
Every state has its own qualification criteria. Most states look at how long you intend to be abroad for (or whether you intend to return to live in the state), however some look at the ties you have maintained in the state instead.
Here is a list of ties that a state might make you liable to state taxes from abroad:
Car registration
State id or a driving license
Voter registered
Owning a property in the state
Continuing to pay bill and services in the state
Having dependents in the state
Having a mailing address in the state (P.O. box or a relative’s house)
Intending to return to live in the state (e.g. if you’re abroad on a temporary work placement)
Maintaining bank accounts in the state, or other financial accounts or assets
Receiving income in the state (e.g. from rent, dividends, or if you perform services remotely)
In some situations, you might be required to file state taxes for the income earned from the state even if you don’t meet the criteria of being a resident. As such, it’s important to dive into the specifics in the state where you were last resident, and if you are still confused about your status, consult an expat tax expert.
What's the best state for expat taxes?
On discovering that they would be liable to pay state taxes after they move abroad, some expats move state first to one with more lenient rules to save money in the long run, especially with exemptions such as the Foreign Earned Income Exclusion allowing expats to reduce their federal US tax bill but there being no such exemptions for state taxes.
States where it doesn’t matter
There are states which have no state income taxes. If you last lived in one of these states, you won’t owe any state tax from overseas, even if you retain ties or receive income in the state. These are:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
Furthermore, there are two states that only charge tax on interest and dividends earned by residents, being:
Tennessee
New Hampshire
States where you’ll need to do something
For the majority of states, other than those with no income tax and ‘sticky’ states, once you let them know that you’re no longer living in the state, they will be happy to let you go. This can be complicated by receiving income in the state or maintaining ties in the state, so it’s important to understand the rules in the state where you last lived and how they apply to you.
Sticky States
‘Sticky’ states are the ones that don’t like to let you go! To avoid paying state taxes in these states, you will have to demonstrate that you have relinquished your ties to the state and you don’t intend to return. These states are:
California
New Mexico
South Carolina
Virginia
New York
Let’s assume that you were a resident of California, which is a sticky state. You then moved to France and now you want to assess your tax obligations. To not have any state tax liability at all, you will have to prove to the state of California that you will not be returning to the state. If you fail to do so, you will be liable to pay tax on your worldwide income.
California also has a safe harbor exception. This means that you will be regarded as a non-resident if you have been out of the state for more than 546 days for employment-related reasons.
If you can’t prove that you are not going to return, then you may well have to file a state tax return along with your federal tax returns every year from abroad.
The residency definition in these states is comparatively very stringent, and if you fail to prove that you are not coming back, you will pay taxes on your worldwide income, irrespective whether you lived in the state during the year or not.
Preparing to minimize state taxes when you move abroad
Before moving, to reduce your state tax obligation, the first step is to research the rules of the state you live in to see whether you may have to file state taxes after you move.
If you think you may have to pay state taxes from abroad, if you live in a ‘sticky’ state for example, you should seek professional advice from an accountant who has experience with expats. Most US CPAs won’t have this experience, so just asking your normal tax professional isn’t normally the best option.
If you live in a ‘sticky’ state, and if you have time and it’s possible logistically for you, you might consider moving to a tax-free state such as Alaska, Florida, or Nevada. Make sure that you meet the criteria for becoming a resident in these states before moving abroad though, as well as meeting the criteria for not being a resident in your previous state.
The best advice though is to always consult expat specialist tax and financial advisors, both before and after you move, to ensure that you are minimizing your state, federal and foreign tax liability.
If you have any questions, don't hesitate to contact us.
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