What You Should Know About State Taxes Before Moving Abroad
As a U.S. citizen or green-card holder living abroad, you are subject to U.S. income tax on your worldwide income as if you were living in the States. You may also have additional filing requirements, such as reporting your foreign bank accounts, investments, and real estate assets above specific minimums.
Often overlooked, however, is the requirement to keep filing a state tax return from overseas unless you take the necessary steps to “break” residency from the last state you called home. Because residency rules vary from state to state, it’s critical to understand them and how they may impact your tax bill.
State taxes for non-residents
Whether you need to file state taxes depends on the rules in the state where you last lived before moving abroad (If that state doesn’t have any income tax, lucky you! None of the following concerns you).
First, remember that nearly all U.S. states taxing income will assess taxes on any income earned in that state, including rented property or income earned while you were physically present. This is why professional athletes file so many tax returns!
Next, most of these states will release you from state income tax filing responsibility if you don’t have income sourced in the state, don’t retain significant ties in the state, and can satisfactorily prove that you don’t reside there.
Residency Rules
A great number of U.S. states allow you to stop filing once you have been abroad for a period longer than six months (the time period can vary), and if you can demonstrate that you are a permanent resident in another country.
However, some—California among them—assume that you might move back at some point and make it particularly difficult, once established, to give up your tax residency. In such cases, we encourage you to plan ahead with a qualified tax advisor to break ties with your former home state. Otherwise, you may continue to be liable for state taxes while living abroad. For the Eagles’ fans among us, this may sound familiar:
“You can check out any time you like
But you can never leave!”[1]
Some of the factors that these “sticky” states consider when determining whether your move is permanent include:
- Keeping a residence or even a mailing address
- Retaining a driver’s license or I.D. card
- Maintaining bank accounts or investments
- Keeping voter registration
- Paying telephone and utility bills
- Association memberships, corporate interests, or employment
- Returning to the state to live for long or frequent periods each year.
- Working physically in the state during the year
- Spouses or dependents residing in the state.
Making a clean break
One strategy to avoid these hurdles is to first move to a no-tax state before moving abroad. It requires severing ties to the original state, establishing domicile in the new state, and collecting and retaining a paper trail to prove it. The following states don’t impose personal income tax: Alaska, Florida, Nevada, Tennessee, Texas, and Washington.
One final caveat: we’ve only outlined basic principles to be aware of in this post, but some details can significantly alter the picture. For instance, although California has very high tax rates, it does not tax Social Security benefits. Keeping your California tax residency would not trigger a big tax bill if most of your retirement income comes from Social Security.
[1] Hotel California by Eagles
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