State Tax Return

State Tax Return

State Tax Return

While many US expats have US federal taxes on the radar, state tax return filing requirements sometimes get missed. Even if you think that you no longer need to file in your former home state while living abroad, you may have state income tax filing requirements that you aren’t aware of.

At Universal Tax Professionals, we are dedicated to assisting you in comprehending your state tax filing obligations. Our team of experienced international tax accountants deeply understands all state tax regulations and can offer valuable insights into your state tax circumstances. Additionally, we provide other personalized US expat tax services to cater to your needs as an American expat.

Do US Expats Have to Continue to Pay State Taxes While Living Abroad?

Living abroad as an expatriate raises questions about state tax obligations. The specifics of whether or not you have to continue paying state taxes depend on various factors. For 2024, the US tax rules remain the same, as an American living abroad, you are still required to file and pay state taxes, depending on the state and if you meet certain criteria.

Previous State of Residence

The state you resided in before moving abroad plays a crucial role. Different states have varying tax regulations, and these laws impact your tax liability.

Duration of Residency

The length of time you lived in your previous state also matters. Being classified as a resident often entails specific tax responsibilities.

Residency Classification Criteria

States with income tax requirements use specific criteria to classify residents. These include:

  • Voter Registration: Where you are registered to vote can influence your residency status.
  • Driver’s License or State ID: The status (expired or current) and location of your license or ID are considered.
  • Vehicle Registration: Where your car is registered is a factor.
  • Property Ownership or Rental: Owning or renting a property in a state can impact your residency.
  • Mortgage/Lease Payments: Financial commitments related to property are taken into account.
  • Family Residency: The location of your family members is considered.
  • Duration of Assignment Abroad: The length of your international assignment is a key factor.

Income Sources Subject to Taxation

Income derived from a state is typically subject to taxation. This includes:

  • Earned Income: Any income earned from working within a state is generally taxable there. For instance, if you return to the US for a visit and work in your home state for a few days, that income may be taxable.
  • Non-Earned Income: Other forms of income, such as rental income, pension income, investment income, or government benefits, may also be subject to state taxation.

State-Specific Regulations

Each state with income tax requirements has its own set of tax laws and regulations. Familiarizing yourself with the specific rules of your former state of residence is essential for understanding your tax obligations while living abroad.

Table of Contents

In summary, US expats’ state tax obligations are influenced by their previous state of residence, the duration of their residency, and the specific criteria used by states to classify residents. Additionally, different types of income may be subject to state taxation. Staying informed about the tax regulations of your previous state is crucial for compliance.

States with No Income Tax

For individuals seeking to minimize their tax burden, residing in a state without income tax can provide a significant financial advantage. As of 2023, there are seven states in the United States that currently do not impose state income tax and will not require you to file a state tax return.

1. Alaska: The Land of the Midnight Sun

Alaska, known for its stunning natural beauty and rugged landscapes, stands out as one of the most tax-friendly states in the US. It derives a significant portion of its revenue from oil and gas production, allowing it to forego state income tax altogether

2. Florida: The Sunshine State

Florida, famous for its warm climate and picturesque beaches, is a magnet for retirees and individuals seeking to escape high-tax states. It has long been a haven for those looking to preserve their income.

3. Nevada: The Silver State

Nevada’s economy, centered around entertainment, tourism, and mining, benefits from not having a state income tax. This has made it an attractive destination for professionals and entrepreneurs.

4. South Dakota: The Mount Rushmore State

South Dakota is celebrated for its low cost of living and absence of state income tax. This has drawn individuals and businesses alike, particularly in the financial services sector.

5. Texas: The Lone Star State

Texas, with its thriving economy and business-friendly environment, is a powerhouse among states without income tax. It’s become a hub for technology companies and entrepreneurs seeking financial flexibility.

6. Washington: The Evergreen State

Washington is renowned for its natural beauty and progressive urban centers. The absence of state income tax has contributed to its appeal, especially for high-earning professionals in fields like technology.

7. Wyoming: The Equality State

Wyoming’s diverse landscapes, including majestic mountains and vast plains, are complemented by its favorable tax policies. The state relies on revenue from industries like energy and agriculture to maintain its income tax-free status.

States with Limited Income Taxation

While New Hampshire and Tennessee are often cited as states without income tax, it’s important to note that they do tax residents on interest and dividend income. This unique approach allows them to forgo taxing earned income but still generate revenue from certain types of investment gains.

Which States Are the Toughest To Break Residency From?

Certain states, often referred to as “sticky states,” pose distinctive challenges when it comes to breaking residency due to their complex regulations. Here are some insights into the residency dynamics of these states:

California

California - State Tax Return

California’s residency rules are notoriously intricate, demanding individuals to demonstrate unequivocal intent to sever ties. Property ownership, employment, and familial connections are all scrutinized. Even maintaining a mere presence within the state can complicate the process of breaking residency.

New Mexico

New Mexico - State Tax Return

New Mexico’s regulations can be intricate, leaving individuals navigating a nuanced process. Establishing clear intent to relinquish residency ties is essential, but the state’s specific requirements can make this a challenging task.

Virginia

Virginia - State Tax Return

New York

New York - State Tax Return

New York employs a “statutory residence test,” scrutinizing days spent in the state and the presence of a permanent abode. This makes it difficult for individuals to effectively break residency, particularly if they retain property or family connections within the state.

South Carolina

South Carolina - State Tax Return

South Carolina places emphasis on domicile, considering factors like property ownership and familial connections. Demonstrating a genuine move away from the state requires careful navigation of these regulations.

Virginia’s stringent approach to contiguous states can be challenging to overcome. Establishing residency elsewhere, especially in neighboring states, may still result in Virginia considering an individual as a resident.

A significant aspect to bear in mind is that all of these “sticky states” mentioned also tax residents on their worldwide income. This adds an additional layer of complexity for expat residents seeking to break residency.

Given the complexities of residency regulations and the taxation of worldwide income, expat residents in these “sticky states” may find it advantageous to take proactive steps to break residency there. This could involve establishing residency in a state with no income tax or one with more lenient regulations facilitating the process for individuals living abroad.

10 Important Things to Remember as a US Expat Regarding State Taxes this 2024

1. Residency Matters: Your state tax obligations are determined by your residency status. Even if you live abroad, you may still be considered a resident of a specific state. Seek professional advice to understand your residency status and its impact on your state tax liability.
2. Establishing a Domicile: Some states may consider you a resident if you maintain a domicile there, regardless of how much time you spend outside the state. Establishing a clear domicile or seeking professional advice can help clarify your tax obligations.
3. Seek Expert Advice: Given the complexity of state tax laws and the potential impact on your financial situation, consulting with a qualified tax advisor who specializes in expatriate taxation is crucial. They can provide personalized guidance based on your specific circumstances.
4. Tax Credits and Exemptions: Explore available tax credits and exemptions for expatriates. These can significantly impact your state tax return. Look into credits for foreign taxes paid and exemptions for foreign-earned income, and ensure you’re taking full advantage of these opportunities.
5. FBAR and Reporting Foreign Financial Assets: As a US expat, you’re required to report your foreign financial assets, including bank accounts, investments, and real estate. This is typically done through the FBAR and other reporting mechanisms. Failing to report accurately can result in substantial penalties.
6. State Tax Residency vs. Federal Tax Residency: Remember that state tax residency rules may differ from federal tax residency rules. It’s possible to be considered a resident for state tax purposes even if you’re not a resident for federal tax purposes.
7. Keep Accurate Records: Maintain thorough and organized records of your financial activities, including income, expenses, and any foreign financial assets. This will be invaluable when preparing your state tax return and ensuring compliance with tax laws.
8. File on Time: Be aware of the filing deadlines for both federal and state taxes. Failing to file on time can lead to penalties and interest charges. Extensions may be available, but it’s essential to understand the requirements and deadlines.
9. Stay Informed about Tax Law Changes: Tax laws, both at the federal and state levels, can change. Stay updated on any developments that may affect your tax obligations as a US expat. This knowledge will help you make informed decisions and stay in compliance with tax regulations.
10. Seek Professional Help for Complex Situations: If your financial situation is particularly complex, or if you have concerns about your state tax liability, don’t hesitate to seek professional help. A tax advisor with expertise in expatriate taxation can provide tailored advice and ensure you’re meeting all your obligations.

Remember, compliance with state tax laws is crucial for maintaining your financial well-being as a US expat. By keeping these key points in mind and seeking professional advice when needed, you can navigate state taxes with confidence and peace of mind.