State Apron Strings Still Attached Even While Living Abroad? Some Options Here!

Photo by Julia Volk: https://www.pexels.com/photo/view-of-the-church-of-sao-vicente-de-fora-in-lisbon-portugal-5193270

The world has always been in motion, right? The urge to travel and explore did not stop with Marco Polo and Christopher Columbus. Current post pandemic times have given workers a lot of flexibility especially about going into work. We see unprecedented levels of global movement among people between states and even countries. 

As more US citizens and green card holders travel globally for work, it is not surprising they wonder if there is a need to file a state tax return. Let's drill into that today. 

Plan Before The Move. 

The relationship you have with the state before you move is an important factor in determining whether you will continue to pay taxes to that state even after you have relocated overseas. 

The factors are: 

• Do you have a State ID or a Driver's License? 
• Are you registered to vote?
• Do you own property?
• Do you maintain a mailing address?
• Do you have income sourced from the state?
• Do you consider the state your "permanent home"? 

Not only that, it is also important to educate oneself if the state considers you a resident based on these factors. 

Some states go by the 180 days rule to determine taxable residency and tax you only on the income sourced to the state. If this is the case, you do not have to file a state tax return even though you are required to continue to file a federal return. {More about the federal tax filing requirement on an older post here.}

There are some states that make it difficult to sever ties, especially California, New Mexico, sometimes New York, South Carolina and Virginia. 

If you have voter registration or hold a state ID or Driver's License or even just have a bank account connected to one of these states, you may be considered a "resident" for tax purposes and will have to report all your income to the state & pay taxes. 

Remember, most states do not offer a Foreign Tax Credit {FTC} on overseas income unlike that available on the federal tax return. 

If you have a connection with one of these states, you may have to make sure you are able to sever all connections before moving overseas. 

What Is The Plan?

The most feasible way to mitigate state taxes if living abroad is to consider setting up "residency" in a state with no income tax. 

States with no income tax are, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Tennessee and New Hampshire are also good options since they only tax interest & dividends sourced to the state. 

If your move overseas is permanent, remember you will still need to maintain an address, bank account and possibly your voter ID state-side for various reasons.

You may need to continue to file a non-resident state tax return to prove that you did not have any income sourced to the state.  

Have You Heard Of the California Safe Harbor Exception?

There is a narrow chance if you are or were a resident of California and plan to or have moved overseas. Under the safe harbor exception, former California residents can be considered to be non-resident if they remain outside the state for more than 546 days and the stay is related to their employment. 

The conditions to the safe harbor exception are:

1. You cannot have received more than $200,000 in intangible income per tax year at any time through out the employment contract. 
2. The principal reason to move out of California is not to avoid income taxes. 

Oops- I Forgot To File My State Tax Returns! 

Well, you can play catch up and file your state tax returns, know that there might be interest & penalties tacked on for those states/ years you owed state income tax. 

Do you still have questions? I always recommend working with a tax professional if your filings are complex. Make sure you are working with someone who is aware of the nuances of a US Citizen living abroad. 

Bibliography: IRS- State Government Websites; California FTB; Moving Out of California; CA FTB Pub.1100- Taxation of Non Residents & Individuals Who Change Residency; CA FTB Pub. 1031 Guideline for Determining Residency Status (2022). 

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