Here on our website and in our blog posts, we have consistently reminded you that when you move abroad and become an expatriate, you must file a Federal Tax Return each year to comply with the IRS. However, the filing obligation may also include state taxes, and each state has its applicable tax legislation with different requirements. Whether or not you pay state taxes will depend on the tax laws of the last state you lived in before moving abroad. Below, we have collected some points you should know about filing a state tax for expatriates living abroad.
Do U.S. Citizens Living Abroad Need To File State Taxes?
If you live abroad, filing state taxes will depend on your state and whether you are still considered a tax resident. You will not need to file state expatriate tax in some states if you live abroad, as they do not charge state income tax.
Best States for Expat Taxes
Nine states do not have state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington State, and Wyoming. The good news is that if you were a resident of one of these states before moving abroad, any income for which you are and will not be subject to state tax, staying in the state, or living as an expatriate from the state. In addition, Tennessee and New Hampshire only collect taxes on interest and dividends.
However, although you don’t have to pay tax on your income, these states still get their revenue through other sources, such as property tax and sales tax. So, don’t forget that if you still own property in these states, you still must pay property tax even if you are living abroad.
Filing a State Tax Return When Living Abroad
If your last state of residence before moving abroad is not a state that does not collect income tax, the first step is to determine with yourself whether you are planning to return to your home state. If you have plans to return in your mind, you are likely to be considered a resident for tax purposes of the state while living abroad. States that tax you in your income, like California, South Carolina, New Mexico and Virginia, are the most diligent in finding ties that suggest this intention of return and future residency.
Therefore, verify if you still have the following ties with your home state:
- You still keep utility bills in the state (i.e. electrical bills still in your name)
- You maintain a residence or mailing address in the state (even a P.O. box or a relative’s house)
- Dependents remaining in the state (spouse or children)
- Property ownership in the state
- You keep your driver’s license or identity card or voting rights in the state
- You lived in the state at any time during the fiscal year
- You return to the state every time you return to the U.S. to live
- You still keep bank accounts or investment accounts held in the state
Second, check and determine if you have income in the state:
- Income earned from working within the state is almost always taxable in that state
- Other income generated from a state source – such as pension/retirement income or government benefits – may be taxed if you are a state resident
How To Avoid States Taxes While Living Abroad
Moving abroad involves many months of planning, and throughout these months, you should pay close attention to your tax matters. The benefits of the time spent preparing taxes can relieve yourself enough of the burden of filing a state declaration. This far outweighs the sometimes tedious tax planning for most expatriates.
Thus, to avoid paying state income taxes while living outside of the U.S., the simplest way that you may want to consider is to abandon residence in any state that collects income taxes and establish a new residence in a state without an income tax. Remember that states that are more rigid in income taxes matters, like California and South Carolina, consider moving abroad as a momentary absence unless you can remove your ties to the state. You can only have one domicile at a time. In addition, your domicile will remain in place until you set up a new home in a different location.
Generally, these states that charge income state tax will only recognize a change to another state and not another country as a change in residency. This is why it is an excellent idea to properly break ties and establish new residence in an income tax-free state before moving offshores.
Cutting Off Ties to the Previous State of Residence
Setting up permanent connections in your new state and/or country of residence will point to your status of having a new domicile, which includes, among other things:
- If you have more than one, the location, use (rented versus owned), and residence size in each location
- Where you spend most of your time and where you work
- Where you keep your most valued items like safety deposit boxes, bank accounts, auto registrations
- How active you are in the local business
- Where your family lives, the location of the children’s school, and social, community, and religious ties
Here are some steps that you may take to establish that you do not aim to return to your previous home state:
- Change the ownership of your properties within the state
- Obtain an ID card in your new state and/or country
- Move with your immediate family (husband, wife, and children)
- Join memberships in your new state and abroad
- Change your address in your bank accounts and/or open a foreign bank account
- Register to vote in your new state as an absentee voter
- Sell your car or change your car registration
File & Pay Your State Taxes for Expats With Evolution Tax and Legal
State tax planning can be complicated when moving abroad, so it is essential to take the necessary precautions before moving. Breaking as many ties with your home state as possible are ways to help you avoid having to file state taxes while you live abroad. Because expatriate state taxes can be complex, planning is the best way to go. Please consult one of Evolution Tax and Legal expat tax lawyers to get the expatriate tax assistance needed to determine the best steps for your case.
However, if you did not plan before moving abroad and just realized that you maybe should have been filing and paying U.S. federal and state taxes as an expat, you still can help you. If the failure to pay tax was an honest mistake, special rules (i.e. Streamlined Foreign Offshore Procedures) might let you as expats catch up on back taxes.
Please get in touch with us if you’d like to plan your expat tax strategy beforehand or, if you are already living abroad, how you can straighten up your tax situation with your residence state.