Do I Have to Pay State Taxes If I Live Abroad?
Understand your state tax obligations as a US citizen living abroad. Learn about residency, severing ties, and income considerations.
US citizens and Green Card holders living abroad face complex tax considerations, extending beyond federal obligations to state income taxes. Moving outside the United States does not automatically eliminate state tax liability. State tax rules vary significantly, depending on individual circumstances and the laws of the state an individual last resided in, rather than solely on physical presence.
How States Determine Residency
States primarily use two factors to determine tax residency: domicile and statutory residency. Domicile refers to an individual’s permanent home, the place they intend to return to whenever absent. An individual can only have one domicile at any given time, which is usually where their social, economic, and family ties are strongest. States examine the “totality of circumstances” to determine domicile, looking for hard evidence of intent.
Statutory residency is based on physical presence within a state for a certain number of days, often 183 days or more, even if one’s domicile is elsewhere. Many states consider any part of a day spent in the state as a full day for statutory residency purposes. If an individual meets the statutory residency test, they may be subject to tax on all their income, regardless of its source, similar to a domiciliary.
States consider various factors when assessing residency. These include time spent in the state, location of a permanent abode, voter registration, driver’s license, vehicle registration, property ownership, bank accounts, professional licenses, and family connections. Other considerations include the location of doctors, lawyers, accountants, pets, and where one purchases necessities or attends social and civic organizations. The overall weight of these factors helps states determine substantial ties.
Steps to Sever State Residency
To formally change state tax residency and potentially avoid future state income tax, individuals must demonstrate a clear intent to abandon their former state domicile and establish a new one. Establishing a new domicile abroad, even if it’s a foreign country, requires active and documented efforts.
Key actions include changing one’s mailing address for all accounts and legal documents, obtaining a new driver’s license and vehicle registration in the new location, and canceling the old ones. It is important to update voter registration in the new location and cancel it in the former state. Selling property in the former state or transferring its title to a business entity can further demonstrate a break in ties.
Individuals should close bank and investment accounts in the former state and open new ones in their new location. Terminating professional licenses, club memberships, and other local affiliations in the former state helps show a clear intent to leave. Documenting time spent outside the former state, such as through travel logs, credit card receipts, and phone records, can be valuable evidence if residency is ever challenged.
Tax Obligations for Non-Residents
Even after successfully severing state tax residency, an individual may still have tax obligations to their former state if they derive income from sources within that state. This is known as “sourced income” and is distinct from residency-based taxation. Common examples of income sourced from a state include rental income from property still owned there, business income from a partnership or S-corporation operating in that state, or income from a state pension.
Non-residents are taxed only on income sourced within that state. For instance, if an individual owns a rental property in a state where they are no longer a resident, they must file a non-resident state income tax return for that state, reporting only the income and expenses related to that property. This income must be included on the resident state tax return, but a tax credit can be claimed in the resident state for taxes paid to the non-resident state to prevent double taxation.
Filing requirements for non-residents vary by state. Some states require a non-resident return if any income is earned from sources within that state, while others have minimum income thresholds. For example, some states require filing only if gross income from state sources exceeds a certain amount, or if total gross income exceeds federal filing requirements.