Do expats pay state taxes? If this question isn’t top of mind when planning an international move, it’s understandable. There are a lot of other (frankly more exciting) things to think about.
Amidst all the excitement, though, it’s important to keep practical details (such as your tax obligations) in mind.
The US operates on a unique taxation system based on citizenship. Due to this system, regardless of where you live in the world, you must file a US tax return if:
- you are a US citizen OR green card holder and
- you meet the minimum income threshold.
In most scenarios when filing a federal income tax return Form 1040 is used to file.
Again, whether you reside in the US or not is irrelevant – you must still declare your worldwide income, wherever it was earned. And to add another layer of complexity, expats may also have to file and pay taxes in the foreign country where they reside.
In addition to filing a federal tax return with the IRS, as a US citizen or green card holder, you may also have state tax return obligations to think about.
How do you know if you need to file a state tax return? The answer to this depends on a variety of factors, including the rules in the state where you resided prior to moving abroad.
In the following article, we dig into the specific rules of certain “sticky” states, explore the implications of moving abroad from an income tax-free state and more.
Read on for our state-level overview of filing US taxes while living abroad.
How state residency determines whether you’ll file state taxes as an expat
Most states will exempt Americans living abroad from paying taxes as long as they meet certain conditions, such as not having income sourced in the state and not maintaining significant ties to the state. Another way a US taxpayer can obtain state tax exemption is by satisfactorily proving they no longer reside there.
Given the above, there are a few reasons a US expat may still have to file state taxes while living in a foreign country, such as if they
- Retain a permanent abode in the state
- Retain other significant ties in the state, such as having dependents that live there, bank or investment accounts (sometimes including pensions) based in the state, and a state driver’s license or other official registrations
- Return to the state to live for long or frequent periods each year
- Physically work in the state during the year
Some states make it more difficult than others to terminate state residency, particularly if you’re moving abroad rather than relocating to another US state. These states are commonly referred to as “sticky states.”
Compared to other states, the five states define residency in ways that make it more challenging to change or disprove residency, and tax worldwide income.
In certain cases, you may be required to file your return in those states — and possibly even pay taxes to them — even if you didn’t live there during the year.
Determining whether you’re a state resident for tax purposes
As mentioned above, determining your state residency for tax purposes in the US can be complex, as the rules vary from state to state. That said, many of them use the following tests as guidelines:
- Physical Presence Test: Many states will consider you a tax resident if you spend a significant amount of time there during the tax year. Often, the threshold is 183 days, but it does vary by state.
- Domicile Test: Your domicile is your permanent legal residence — the place you consider your true home, and the place you intend to return to even if you temporarily live elsewhere. If you maintain a domicile in a state, they may consider you a resident even if you don’t spend most of your time there.
- Statutory Residency Test: Some states have statutory residency rules that determine residency based on the number of days you spend in the state combined with other factors, such as maintaining a permanent abode (like a house or apartment) in the state.
We cannot stress enough that rules vary from state to state. So, you’ll want to review the specific tax laws and guidelines of the one you most recently held tax residency in. If you’re ever unsure about where you stand, it’s best to consult a tax professional.
Navigating filing multiple state tax returns
In certain cases, you may need to file tax returns in multiple states, such as if you:
- Worked in multiple states
- Maintain residency or domicile in one state and work or do business in another (unless the state you reside or do business in has a reciprocity agreement)
- Have a spouse who worked in a different state than you
- Changed your residency or domicile from one state to another
- Rent out a property in a different state than the one in which you maintain residency or a domicile
- Generate other types of income in a state that you don’t reside in, such as running a business that is located there
Filing multiple tax returns can be challenging and time-consuming. What’s more, it’s critical to be well-informed about the different state-specific tax breaks, obligations, and legislation. Working with a tax professional is typically the best way to ensure that you stay compliant while paying no more than you’re required to.
Self-employment tax considerations
When you work for yourself, tax rules get even more complicated, unfortunately.
As you may already know, self-employed individuals must pay a federal tax of 12.4% for Social Security and 2.9% for Medicare. Because the self-employed have no employer to withhold taxes from their paycheck, they must proactively make quarterly estimated tax payments.
The income that self-employed US expats who are tax residents of a particular state earn is also subject to state-level income taxes.
Note: This only applies if the state does indeed have an income tax — more on that below.
State income tax rates vary greatly, from 0% in a handful of states to 12.3% in California.
Typically, self-employed US expats with state income tax obligations make their payments via quarterly estimates as well. Some places even levy local income taxes, although this is much less common.
States with no income tax
As mentioned above, there are a few states that don’t impose state-level income taxes at all.
Note: In addition to these eight states, New Hampshire only taxes income from dividends and interest — although these taxes are set to be phased out by the 2023 tax year (aka the taxes you’ll file in 2024).
Should you change your state residency before moving abroad?
Changing your state residency prior to becoming an expat can be a beneficial and successful tax mitigation strategy. One way to do this is by severing ties with your state before moving abroad.
How to sever ties with your state of residence
Most of the time, ensuring that you have no significant ties in the state will be enough to terminate your residency. This might involve:
- Canceling your old state ID
- Updating official registrations (e.g. voter registration, car registration) to reflect your new location
- Revising official documents that reference your prior state (e.g. estate planning documents)
- Selling any property you own in that state
- Closing the financial accounts open in your previous state
- Selling or moving all of your belongings out of that state
- Integrating yourself into your new community (e.g. joining a local club, enrolling your child in a local school, transferring your medical records to a local healthcare provider)
🤝 Get expert approval
We recommend confirming your residency approach to state-based taxation with a US expat tax accountant knowledgeable about your target state for tax purposes, as each state is unique and many of the rules aren’t as black and white as they may seem.
For the five sticky states mentioned earlier (California, South Carolina, New Mexico, Virginia, and New York) terminating residency may require additional precautions, so research their rules carefully.
Establishing residency in a more favorable state
If you’re wondering how to reduce or avoid state income tax obligations as a US expat, there is one completely above-the-board way to do so: changing your residency before your move abroad to a state with no income taxes.
There are many actions you can take to support a residency claim in a particular state, such as purchasing or renting a property there.
Other options include registering your business in the state and opening financial accounts there. If you’re eligible to get a state ID or add a local address to official documents and registrations, that will support your case even more.
Finally, you can support a residency claim by proving your family lives there, and/or by spending enough time there to be considered a resident.
While all of these actions support a residency claim, it’s important to consult with a professional to ensure that the steps you’re taking are the right ones for your desired state of residence.