State Tax Considerations for Expats

Understanding State Tax Obligations

While federal tax obligations for US expats are clear, state tax requirements can be complex and vary significantly by state. Even when living abroad, you may still have state tax obligations based on your domicile, residency status, or income sources.

State Residency Tests

Domicile vs. Residency

Domicile

Your permanent legal residence - the place you intend to return to and consider your true home.

Residency

Determined by physical presence, typically based on days spent in the state during the tax year.

Common Residency Tests

183-Day Rule: Most states consider you a resident if present for 183+ days
Domicile Test: Resident if the state is your domicile, regardless of days present
Permanent Place of Abode: Having a home available year-round may trigger residency
Safe Harbor Rules: Some states provide safe harbors for temporary absences

No-Income-Tax States

States with No Personal Income Tax

• Alaska
• Florida
• Nevada
• New Hampshire*

• South Dakota
• Tennessee*
• Texas
• Washington
• Wyoming

*New Hampshire and Tennessee tax investment income only

High-Tax States to Consider Leaving

States with Aggressive Tax Collection

• California: Worldwide income tax, strict domicile rules
• New York: Statutory residency test, high rates
• New Jersey: Aggressive audit practices
• Massachusetts: Complex residency rules
• Connecticut: High rates, domicile-based taxation

Establishing Non-Residency

Steps to Break State Tax Residency

Change Voter Registration: Register in new state or abroad
Obtain New Driver's License: Get license in new state or foreign license
Register Vehicles: Register cars in new state
Change Bank Accounts: Move accounts to new state or foreign banks
File Non-Resident Returns: File part-year resident return for departure year
Establish New Domicile: Create ties to new location

Severing Financial Ties

Close local bank accounts and investment accounts
Terminate local business registrations
Cancel gym memberships and club memberships
Change address for all financial institutions
Redirect mail to new address

Safe Harbor Provisions

New York's Temporary Absence Safe Harbor

New York provides relief for temporary absences if you:

Don't maintain a permanent place of abode in NY
Maintain a permanent place of abode elsewhere
Spend 30 days or fewer in NY during the tax year

California's Temporary Absence Rules

California may consider you a non-resident during temporary absences if:

The absence is for a limited and definite period
You have a definite plan to return
You don't establish domicile elsewhere

Warning: California's safe harbor is very restrictive and difficult to qualify for. Most long-term expats should establish domicile elsewhere.

State-Specific Considerations

California

Key Challenges:

• Presumes domicile continues until clearly abandoned
• Taxes worldwide income of residents
• Strict audit procedures for high earners
• Limited safe harbor for temporary absences

Departure Strategy:

• Clearly establish intent to abandon California domicile
• Establish new domicile before departure
• Minimize California contacts during absence
• Keep detailed records of departure activities

New York

Residency Tests:

• Domicile test (permanent home)
• Statutory residency (183+ days + permanent place of abode)

Planning Opportunities:

• Establish domicile in no-tax state before moving abroad
• Use temporary absence safe harbor if qualifying
• Consider trust planning for New York source income

Income Sourcing Rules

Common State Source Income

Rental Income: Sourced to state where property is located
Business Income: Sourced based on where business activities occur
Investment Income: Often sourced to state of domicile
Retirement Distributions: May be sourced to state of employment
Stock Options: Complex sourcing rules based on vesting and exercise

Multi-State Tax Planning

Choosing a New Domicile State

Tax-Favorable States

• Texas - No income tax, business-friendly
• Florida - No income tax, no estate tax
• Nevada - No income tax, asset protection
• Wyoming - No income tax, privacy laws
• South Dakota - No income tax, trust-friendly

Considerations

• Family and business connections
• Property ownership requirements
• Estate and inheritance tax implications
• Future retirement plans
• Professional licensing requirements

Record Keeping for State Tax Purposes

Essential Documentation

Travel logs showing days in each state
Hotel and travel receipts
Lease agreements or property deeds
Voter registration and driver's license changes
Bank account statements showing new addresses
Employment records and contracts
Medical and professional service records

Common State Tax Mistakes

Not filing part-year resident returns

Must file final returns in departure year to establish non-residency

Maintaining too many ties to old state

Keeping bank accounts, club memberships, or business activities can maintain residency

Not establishing new domicile properly

Simply living abroad doesn't automatically change your US domicile

Ignoring state source income obligations

May still owe taxes on income sourced to former state of residence

State Tax Audits

Audit Triggers

Large change in reported income between years
Claiming non-residency while maintaining significant ties
High-income taxpayers claiming new residency
Inconsistent information between federal and state returns

Audit Defense Strategies

Maintain contemporaneous records of departure activities
Document intent to establish new domicile
Keep records showing minimal contacts with former state
Be prepared to demonstrate ties to new domicile

Planning Before Departure

Pre-Departure Checklist

Consult with tax professional about state tax implications
Choose new domicile state and establish connections
Plan timing of departure to minimize state tax exposure
Consider accelerating or deferring income as appropriate
Review and restructure investments and business interests
Plan for ongoing state source income obligations