Expat Taxes 101: How to file a State Tax Return

As an expat you are regularly reminded that you need to file a Federal Tax Return each year in order to stay compliant with the IRS. Of equal importance and often overlooked, expatriates also need to file state tax returns. Each state has its own governing body and with that, different laws, regulations and requirements based on where you lived before you moved abroad. If you need help with filing your State Tax Return, take a look at our top tips for US citizens living overseas.

Understanding State Taxes

State taxes vary state by state. In fact, some states don’t even have state income taxes, some don’t require expats to file and some require everyone to file, including expats. Typically, where a state doesn’t have income tax, there is no need to file as an expat. The following states don’t require you to file a state tax return if you are a resident:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Whilst the above make it easy, there are a number of states that make it challenging to end your formal residency and therefore often tax your worldwide income. States with rigid residency definitions consider you a resident even if you move away permanently. It is also often the case that they consider moving abroad a temporary leave of absence unless you can completely cut ties, including:

  • Property ownership
  • Drivers license or ID card
  • Bank accounts
  • Voter registration, including absentee ballots
  • State mailing address
  • Dependents living in the state

California, South Carolina, New Mexico and Virginia are some of the most challenging states for expats. If you are still linked to any state as per the above criteria, you will need to report your worldwide income on your state tax return and pay state taxes to the state – even if you haven’t lived there during the filing year.

Some states, including California, make some exceptions for expats. Under the “safe harbour” rule, residents can classify as non-residents for tax purposes if they leave the country on employment-related contracts. To qualify you’ll need to have less than $200,000 investment income during the year and maintain residence outside the state for at least 546 consecutive days. If you have any questions about whether you need to file a state tax return, we would always advise talking to a qualified professional.

How to file a state tax return as an expat

There are two questions to ask yourself when looking to understanding when you need to file a state tax return while living overseas;

Are you classified as a resident of the state for tax purposes

  • Have you lived in the state at any point during the year?
  • Does your immediate family live in state?
  • Do you maintain a permanent residence in state?
  • Do you keep a state driving license, ID card or voting rights?

Determine if you have income in the state 

  • Income earned in the state is almost always taxable
  • Other income e.g. pensions and government benefits may be taxable

As a general rule, most states only require you to file a state tax return if you live in the state during the year. Typically this is only on tax income generated within the state. Most states will consider you a non-resident if you’ve lived outside the state for more than 6 months, however make sure to check to avoid fines and penalties.

Unsure If You Need to File a State Tax Return?

Our expat-expert IRS Enrolled Agents can provide the advice you need in order to become and stay compliant on your expat tax obligations. Contact us today for help understanding your state tax requirements.

David Holmes

David is a Chartered Tax Adviser and specialises in the interaction of UK and US taxes and the taxation of those who are not domiciled in the UK. He is particularly involved in the complex tax calculations that we handle relating to remittances, voluntary disclosures, US PFIC rules, Controlled Foreign Corporations and both UK and US trusts as well as completing UK and US tax returns and providing tax advice. David is a Cambridge graduate and previously worked at PwC.