Your responsibilities will depend on the state you lived in before you moved overseas. The state income tax return residency rules for taxpayers that reside overseas vary greatly from state to state, and there are numerous ways that each state makes this determination. Some states use a “time-based” test, while other states, such as California, look at whether you are considered to have “tax domicile” in the state. This is often not as simple as whether you are physically present in the state or not. There are many criteria used in determining whether the state is a taxpayer’s domicile. Each state has their own definition. It is true that one of the common determinants is the taxpayer’s prolonged physical presence. Some states base their determination on other factors, including where the individual has family ties, where he or she has been filing resident tax returns, where he or she is registered to vote or has a driver’s license, where he or she owns property, or where the person has bank accounts or other financial holdings.
We encourage taxpayers to review their state tax filing requirements and state residency with their tax professional to determine if they are considered a resident, part-year resident or non-resident state taxpayer.
Individuals are generally considered residents, and are thus fully liable for taxes, if they are domiciled in the state or if they are living in the state (usually at least six months of the year), but are not domiciled there.
A non-resident, according to most states’ definitions, is an individual who earns income sourced within the specific state, but does not live there, or is living there for only part of the year (usually fewer than six months).
There are currently seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee have no tax on personal income, but do tax profits from the sale of bonds and property.
Taxpayers should keep in mind that states can challenge the residency status of a taxpayer, and that this is not unusual, especially with some of the more aggressive states – generally those states that perpetually have budget issues, such as California, Massachusetts, New York, Virginia, etc. To reduce your risk of future demands of state tax returns or liability, it is important that you research your state tax filing requirements and make the necessary changes prior to departure, ensuring the certainty that your filing choice will not be challenged in the future. If you maintain a home in the state, have a state-issued drivers’ license, financial accounts, voter registration status, etc., it is possible that some states may use any of these as proof that you were a resident of that state while living abroad.
For further assistance with determining your state income tax residency as part of an engagement for services, please be sure to 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.