How to Determine State Income Tax Residency For U.S. Expats

Many overseas taxpayers have questions about their filing requirements and potential tax liability as it pertains to filing a state income tax return during periods when they are residing overseas. Most people incorrectly assume that residing overseas means a state no longer considers them a resident for tax filing. If the state that you resided in prior to moving overseas was in a state that has no state income tax, such as Nevada and Florida, then you will continue to have no state income tax filing requirements.

However, if you previously lived in a state with income taxes, the answer is not always clear-cut. You may still be liable to file state taxes. The state income tax return residency rules for taxpayers who reside overseas vary greatly from state to state. Each state makes this determination in numerous ways.

State Residency Determination Methods

Understanding how states determine residency for tax purposes is essential for managing your tax obligations effectively. States generally use two primary methods: the Domicile Test and the Statutory Residency Test.

Domicile Test

The domicile test focuses on identifying your permanent legal home, where you intend to return, even if you are temporarily living elsewhere. Factors influencing domicile determination include:

• Family Ties: Where your immediate family lives.
• Physical Presence: The amount of time spent in the state.
• Property Ownership: Owning or renting a home in the state.
• Driver’s License and Vehicle Registration: Holding a state-issued driver’s license or registering your vehicle in the state.
• Voter Registration: Registering to vote in the state.
• Financial and Professional Connections: Maintaining bank accounts, professional licenses, and memberships in organizations within the state.

Each state has its own criteria and rules for determining domicile. For example, California evaluates whether your presence is more than temporary or transitory, considering multiple factors beyond just physical presence.

Statutory Residency Test

The statutory residency test is based primarily on the number of days spent in a state during the tax year. Many states employ the “183-day rule,” considering you a resident if you spend 183 days or more in the state. This rule includes any part of a day spent in the state, so even brief visits count towards the total.

Other aspects considered include:

• Permanent Place of Abode: Having a home that you use regularly within the state.
• Employment Location: Working in the state can also determine residency, especially if your work involves significant physical presence there.

The statutory residency test helps states identify residents who might have substantial interactions within the state but do not qualify as domiciliaries.

TIP: Keep copies of all documents that show your intent to establish domicile, such as child school enrollments, club memberships, and detailed travel logs. This evidence can prove invaluable if the IRS questions your residency status.

Our Recommendations

Tax Samaritan encourages taxpayers to review their state tax filing requirements and residency status with their tax professional to determine whether the state considers them a resident, part-year, or non-resident taxpayer. According to most states’ definitions, a non-resident is an individual who earns income sourced within the specific state but does not live there or lives there for only part of the year (usually fewer than six months).

States generally consider individuals residents and fully liable for taxes if they domicile in the state or live in the state (usually for at least six months of the year) but do not domicile there.

Strategies for Changing State Residency

Changing your state residency effectively, especially when moving to a state with no income tax, involves several strategic steps. These steps ensure that your move receives legal recognition and help you avoid potential disputes with your previous state of residence. Here’s a detailed guide to making the transition:

1. Establish a Physical Presence

To change your state residency, begin by establishing a physical presence in your new state. This involves renting or purchasing a home and making it your primary residence. Spending significant time in your new home, ideally over 183 days per year, demonstrates your intent to make the new state your permanent residence.

2. Update Legal Documents

Update all your legal documents to reflect your new address. This includes applying for a new driver’s license and registering your vehicle in the new state, typically required within 30 days of moving. Register to vote in your new state, as voter registration is a strong indicator of your intent to reside there permanently. Additionally, notify the IRS and other relevant tax authorities of your address change using Form 8822 to ensure all tax documents are sent to your new address.

3. Close Previous State Ties

Severing ties with your former state is vital. Consider selling any property you own in your old state or leasing it out to demonstrate that you no longer intend to return. Close any local bank accounts and transfer your primary banking activities to institutions in your new state. Cancel memberships and subscriptions linked to your previous state, such as gym memberships and local clubs, to further establish your commitment to your new residency.

4. Document the Move

Maintain thorough documentation of your move to support your residency claim. This includes keeping copies of lease or purchase agreements, utility bills, and moving expense receipts. Using the USPS change of address service to forward mail from your old address to your new one helps establish the timeline of your move and provides a clear record of your relocation.

5. Update Professional and Financial Records

If your profession requires state licensing, apply for a new license in your new state and relinquish any old licenses if necessary. Update your address with all insurance providers and consider getting new policies if required by your new state’s regulations. Ensure that your income is reported correctly based on your new residency status to avoid any tax complications.

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Sticky States

Certain states, often referred to as “sticky states,” have stringent rules that make it particularly challenging to terminate residency. These states, including California, New York, and Virginia, that oftentimes require substantial evidence that you have permanently left. This includes selling property, severing financial and social ties, and demonstrating clear intent to establish residency elsewhere.

California

California is notoriously strict about residency termination. The state employs a Safe Harbor Rule, which allows for non-residency status if you are out of the state under specific conditions, such as being on an employment assignment for at least 546 consecutive days. However, this rule has stringent requirements and limited applicability. Additionally, California does not recognize the Foreign Earned Income Exclusion (FEIE) for state taxes, meaning that even if you qualify for the FEIE on your federal return, you may still owe state taxes to California if they deem you a resident.

New York

New York also has rigorous residency rules and utilizes a statutory residency test alongside the domicile test. To terminate residency, you must not only establish a new domicile but also prove that you were not present in the state for more than 183 days in a given year. New York examines various factors, including where you maintain your primary home, family connections, and financial activities. Even minor connections, like memberships in local organizations, can be scrutinized​.

Virginia

Virginia is another state known for its aggressive residency retention policies. The state requires clear evidence that you have permanently left, including selling or leasing your Virginia home, relocating your primary bank accounts, and severing all substantial ties with the state. Additionally, Virginia looks at factors such as where your family resides, where you hold professional licenses, and where you engage in social and community activities.

Virginia uses both domicile and statutory residency tests, similar to New York. This means even if you establish a new domicile, you could still be considered a Virginia resident if you maintain significant connections to the state.

Multiple State Tax Returns for Expats

Filing multiple state tax returns can be particularly challenging for U.S. expats with ties to more than one state. Understanding when and why you must file in multiple states ensures compliance and avoids unnecessary tax liabilities. Here’s what you need to know:

Reasons You May Need to File Multiple State Tax Returns

1. Residency in Multiple States: If you lived in more than one state during a tax year, you might be required to file tax returns in each state. This situation often arises if you move states mid-year or maintain significant ties to more than one state. Each state will have its criteria for what constitutes a resident or part-year resident. So, make sure to review these rules carefully.
2. Income from Multiple States: If you earn income from sources in multiple states, you may need to file tax returns with each state where the income was earned. This can include wages, rental income, or business income. States generally tax income sourced within their borders. So, it’s essential to accurately report and allocate income earned in different states.

Important Considerations

State Tax Reciprocity Agreements

Some states have reciprocity agreements that simplify tax filing for residents working across state lines. These agreements allow you to pay taxes only in your state of residence, potentially avoiding the need to file multiple returns. For instance, a reciprocity agreement might allow you to file only in Illinois if you live in Illinois and work in Wisconsin.

Tax Credits and Deductions

Many states offer tax credits to mitigate the burden of double taxation. For instance, you might receive a credit for taxes paid to another state, which reduces your overall tax liability. Additionally, specific deductions might be available for income earned out of state.

TIP: Multi-state tax filings are complex. It is highly recommended that you consult with a tax professional experienced in handling expat tax issues. They can ensure accurate filings, help navigate state-specific regulations, and identify opportunities to minimize your tax burden.

FAQS About State Taxes for Expats

Which states do not impose an income tax on earned income?

There are currently seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, New Hampshire and Tennessee do not tax personal income but do tax profits from investments like bonds and property sales.

Do I have to file a state tax return while I’m abroad?

Your responsibilities depend on the state you lived in before moving overseas. Some states use a “time-based” test, while others look at whether you have “tax domicile” in the state. Factors include prolonged physical presence, family ties, voter registration, property ownership, and financial holdings.

Which states require Americans living abroad to file income taxes?

Most states only require you to file a state tax return if you lived in the state during the year. However, some states may tax income sourced within the state. This can include rental or investment income, even if you live abroad. 

What is a nonresident for state tax purposes?

A nonresident is generally someone who does not reside in the state but earns income sourced within the state. This can include wages earned while working in the state, rental income from property within the state, or income from a business located in the state. Nonresidents are typically only taxed on the income sourced within the state​.

How to avoid state taxes while living abroad?

To avoid state taxes, you need to terminate your residency in your previous state before moving abroad. This involves severing all significant ties, such as selling property, closing local bank accounts, canceling voter registration, and obtaining a driver’s license in a new state if applicable. Establishing residency in a state with no income tax before moving abroad can also be beneficial​.

TIP: Understand the specific thresholds and conditions that qualify you as a nonresident in your state. This clarity helps in planning your income sourcing and tax strategies effectively.

Challenges to Residency Status and Professional Assistance

Taxpayers should keep in mind that states could challenge a taxpayer’s residency status and that this is not unusual with some of the more aggressive states. To reduce your risk of future demands of state tax returns or liability, you must research your state tax filing requirements and make the necessary changes before departure to have increased certainty that your filing choice will not be challenged in the future. If you maintain a home in the state, a state-issued driver’s license, financial accounts, voter registration status, etc., some states may use that as proof that you were a resident of that state while living abroad.

For further assistance in determining your state income tax residency as part of an engagement for services, please contact Tax Samaritan or your tax professional. If you are preparing your own return, we recommend checking the regulations with the relevant state tax authority.

We are experts in filing both state income tax returns and federal returns. With Tax Samaritan, your state income taxes are prepared efficiently and streamlined so that we can quickly determine your state tax residency.

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