Do Expats Pay State Taxes? (Hint: It Depends On The State)

by | Nov 20, 2024 | US Taxes for Americans Living Abroad

Detailed US map used in guide on state taxes for expats

By Vincenzo Villamena, CPA

You would think that moving away from the United States lets you off the hook from filing US state taxes. But unfortunately, some US states require that expats pay state taxes.

It is a common misconception that you only file state taxes if you live there. This inaccurate belief can have costly repercussions.

With some planning, however, you can avoid state taxes when living abroad. (We recently published an article on Forbes about how location-independent entrepreneurs can save taxes by changing their state.)

If you are new to expat taxes, please check out our Guide To US Expat Taxes. You can also schedule a consultation with our experts to get advice for your tax situation.

In this guide to state taxes for expats we cover the following:

Do US citizens living abroad need to file state taxes?

If Americans abroad must still file a state tax return depends on the state. In some states, US citizens living abroad are required to file and may owe state taxes. In other states, expats neither file nor owe state taxes. We discuss the easy and difficult states further below.

 

You might think the state doesn’t know or care. In our experience though, some states can be quite aggressive in pursuing their taxpayers, even abroad. And if you don’t file while you are abroad, a big tax bill might await you when you move back to the state.

After a few years abroad, you may end up returning to your old home state and start filing tax returns again. The state will notice the gap and can notify you that you owe back taxes, potentially with penalties and interest.

In addition, some states do not allow the Foreign Earned Income Exclusion, e.g. California. So you may have to pay full state income tax of income earned abroad.l

If you cannot prove that you were resident in another state during that time, they may require you to pay your taxes for those missing years.

And it’s not just that expats pay state income tax in some states. Depending on the state, US citizens abroad may also owe dividend taxes, estate taxes, corporate taxes, and more. Furthermore, if you failed to file and pay state taxes while you were abroad, you may owe penalties or interest. In short, misunderstanding your state’s filing requirements and failing to make other arrangements, can be costly.

You might think that you have no intention of returning to your old state. In that case, and depending on the state, it might be better to move to a different state before moving abroad. More about that later.

The first step for expats when it comes to state tax is to determine how their state handles the taxation.

Domicile vs. residency: Why It matters

Understanding how your state defines “home” is key.

  • Domicile is your true, permanent home — the place you intend to return to.
  • Residency is where you currently live, often for work or study.

You can have multiple residences but only one domicile.
 To stop paying state tax, you must show you’ve changed your domicile, not just your mailing address.

Best state residency for expats – and worst

Generally, US states fall into three broad categories when it comes to expat state taxes: the easy ones, the somewhat neutral ones, and the difficult or “sticky” ones.

A variety of factors determine how states are categorized. Whether the state has an income tax, how easy it is to leave the state, and the state’s reputation all play a role.

Easy states

The easy states for expats are those that don’t have an individual income tax to begin with. This includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Tennessee and New Hampshire are also fairly easy as they only collect state taxes on interest and dividends but not on ordinary income such as wages and salaries.

Many of these states also have reduced dividend or interest taxes, corporate taxes, property taxes, or inheritance tax. In addition, taxpayers may be able to significantly reduce their costs of living.

In recent years, several high-profile entrepreneurs and business leaders have made headlines by moving to states without an income tax. For example, hedge-fund manager David Tepper relocated from New Jersey to Florida.

Likewise, Larry Ellison, the co-founder of Oracle, bought a property in Nevada. Such moves have become so common that a neighborhood near Lake Tahoe was even nicknamed “Billionaires Row”.

Neutral states

Most states are neither easy nor difficult. Usually, if you have been gone for a while, they will stop considering you a tax resident. In some cases, you may have to prove that you live abroad and submit some paperwork, but you are unlikely to face many hurdles.

Difficult states

Four states are known for making it especially difficult to escape their taxation when moving abroad. They are sometimes called “sticky” states and include Virginia, New Mexico, California, and South Carolina. California especially can be difficult for expats. We explain more about California taxes for expat and the Safe Harbor Rule below.

We have also seen issues with expats from Massachusetts, Maryland, and North Carolina.

Those states won’t let you go easily, even when moving abroad. They assume that you will come back and therefore should remain a tax resident for the entire time spent abroad.

To leave the state and tax residency behind, you must show that you have no intentions to ever come back to that state. Otherwise, you will need to continue to pay state tax on your income.

California Safe Harbor Rule

California is the most aggressive state for expats. It taxes all income of residents, even income earned abroad, and doesn’t allow the Foreign Earned Income Exclusion (FEIE).

But there’s one exception, the Safe Harbor Rule.

If you’re a Californian working overseas under an employment contract of at least 546 consecutive days (about 18 months), you may qualify as a non-resident.
 You must also:

  • Spend fewer than 45 days in California during the year, and
  • Keep investment income under a set limit.

If you meet those conditions, California will treat you as a non-resident for tax purposes.  However, if you return before the 546 days end or maintain significant California ties, you may lose that protection.

How expats can avoid paying state tax

If you’re leaving from a “sticky” state, consider moving to a no-income-tax state before you leave the country.

 But remember: changing your address is not enough.

States look at intent, you must show that you genuinely left for good. That means selling or renting out your home, closing state accounts, changing your voter registration, and moving family and belongings out of state.

The tax savings can be substantial. For example, a Californian earning $200,000 could owe roughly $16,000 a year in state taxes that would disappear after changing domicile to Florida or Texas.

How to change your US state residency

You should sever as many ties to the state as possible and create new ties in your new state. As you make cut ties and build new ones, keep detailed records. When possible, make these changes in writing for your records. In the case of an audit, records documenting the move can be crucial.

The tax authorities look at ties such as:

  • Real estate ownership
  • Bank accounts
  • Voter registration
  • Driver’s license
  • Mailing address
  • Family members, especially dependents
  • Health care providers
  • Open a new safety deposit box, bank and brokerage accounts
  • Update your address anywhere it is on file

California for example, will even track your cell phone records and look at your credit card statements to see where you spent your money. We know cases where California asked for the purpose of moving to Nevada.

Especially when moving from a high-tax state to a neighboring low/no-income-tax state, you need to build a solid case to prove that you really became a resident there.

Another important step is establishing an emotional connection to the new state. Disputes over tax domicile have been settled based on this. Art, photos, personal mementos, and heirlooms should all be relocated to the new domicile. You should also move your pets to the new home.

You can also show local ties by participating in the local community through clubs, the public library, sports leagues, and temples or churches.

Changing domicile should be done well before moving abroad.  We have seen domicile changes after moving overseas but this carries risks when trying to prove the case to your old state. Plan ahead, especially when you expect a major taxable event, for example, selling a business with hefty capital gains.

If you move states before leaving the country, you should plan to spend as much time as possible in the new state. Depending on the state, there may be specific time requirements that are important for residency.

Finally, consider selling your home in the previous state. If you don’t want to sell the property, you should not use it as the primary residence.

Frequently asked questions: State taxes for expats

Do I still owe state taxes if I move abroad permanently?

It depends on your last state of residence. Some states continue taxing you until you prove you changed your domicile and have no intent to return.

Which states don’t tax expats?

States with no income tax include Florida, Texas, Nevada, Wyoming, Washington, South Dakota, and Alaska. Tennessee and New Hampshire only tax dividends and interest.

What’s the difference between domicile and residency?

Domicile is your permanent home, the place you intend to return to. Residency can be temporary, based on where you live or earn income. You can have many residences but only one domicile.

Can California tax my income earned abroad?

Yes. California taxes all income of its residents, even income earned outside the US, and it doesn’t allow the Foreign Earned Income Exclusion. To stop being taxed, you must qualify as a non-resident under the Safe Harbor rule or cut all ties.

How can I prove I’m no longer a resident of my state?

Change your driver’s license and voter registration, close local accounts, sell or rent your home, and establish ties in a new state or country. Keep written records showing the move was permanent.

What happens if I ignore state filing requirements while abroad?

If your old state believes you’re still a resident, they can bill you for unpaid taxes, penalties, and interest once you return or report US income. Some states are aggressive in pursuing back taxes.

Filing a state tax return when living abroad

When moving away from the US, especially from a sticky state, you should file a tax return for the last tax year. It shows you as a part-year resident and that you will not be a resident anymore. You may still need to file a non-resident return in the following years, depending on your state and your specific tax situation.

For example, if you continue to have rental property or some other income source in that state, you would still have to file. If in doubt, it is better to file a state return as non-resident than not filing at all.

As always, when making significant financial or tax decisions, you should speak with an expert. In our experience, states will want to see the appropriate documentation showing that you moved and live abroad.

Each case is unique, and there are no one-size-fits-all solutions. Experts can help ensure that the domicile is correctly changed and reduce the likelihood of an audit.

If you’re unsure how your state will treat your move, schedule a consultation with our team. We’ve helped thousands of Americans abroad reduce state-level tax exposure and make clean, compliant exits.

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<a href="https://onlinetaxman.com/author/vincenzovillamena/" target="_self">Vincenzo Villamena, CPA</a>

Vincenzo Villamena, CPA

Vincenzo Villamena, CPA is Founder and CEO of Online Taxman. Having previously worked at PwC in New York, he has 20 years' experience in expat taxes and regularly appears in the media as a thought leader in accounting and finances for overseas Americans. Vincenzo lovees to travel, is fluent in Spanish, Portuguese, and Italian, and currently resides in Rio De Janeiro, Brazil.

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