You may have been surprised to learn that you still need to file and pay Federal income taxes, even when you are no longer living or working in the U.S. Perhaps even more surprising: you may still have to file and pay State income taxes.
But it is true! Many States require you to become a resident of another State or country before you can stop filing and paying income taxes. And some States are very strict about what it takes to become a resident elsewhere. It can be done; however, planning before
The Great Seven
If you move overseas while a resident of one of the following seven States, you do not need to file or pay State income tax:
- South Dakota
This is so because these States do not have an income tax. Therefore, if you live in one of the “Great Seven”, we recommend you retain your residence in that State.
The Good Two
Tennessee and New Hampshire only collect income
Bottom line, if you move overseas from one of these nine States, the State will not tax your income (or only your dividends and interest, in the case of Tennessee and New Hampshire). Further, if you move overseas from one of the “Great Seven”, you won’t have to file a State income tax return (although you generally still do need to file a Federal income tax return).
Therefore, moving to one of these States (and establishing residence) before moving overseas is a good idea, if possible. We’ll discuss this in more detail below.
The Ugly Four
Unfortunately, if you move overseas while a resident of Colorado, New Mexico, South Carolina or Virginia, the news is not as good.
When you move away from these States, you must prove (to the satisfaction of the state), that you are moving away permanently. In particular, these States require that you must move to another State and establish residency there before they accept that you have moved away. Therefore, if you move overseas, they generally will still consider you a resident of the State. And if you are resident of that State, you must file and pay State income taxes (no matter that you no longer live there).
The remaining 37 States are manageable, but it does require some planning. For the majority of the rest of the States, you will no longer be a resident of that State if you have been gone for more than six months without an intention to return (though you will have to prove residency elsewhere in another State or country). However, proving you reside in another State or overseas is not overly difficult.
Establishing Residency Elsewhere: Intention to Return
In short, except if you reside in one of the “Great Seven”, you are better off trying to establish residency elsewhere. Establishing residency elsewhere, though, requires that you have no present intention of returning to the State. If you do intend to return to the State, you remain a resident and must file and pay taxes in that State (subject to limitations and qualifications).
If you do not intend to return be prepared to prove it. Some helpful evidence is:
- No utility bills in the former State; utility bills in your new place of residence
- Register to vote in your new place of residence
- Surrender your drivers’ license and library card in your former State and get one in your new place of residence
- Your mailing address should be in your new place of residence
- Close bank, savings and investment accounts based in your former State and open new ones in your new place of residence
- Sell or lease to third parties any properties you own in your former State and establish a home in your new place of residence; declare your new home as your homestead
- Transfer your memberships and associations (e.g., church and civic groups) to your new place of residence
State Based Income
One last thing. Up until now, we have been discussing whether you would need to file and pay State income taxes on amounts you earned outside of the State. In all cases, whether you are a resident of the State or not, you need to pay taxes on amounts you make in the State. For instance, if you live overseas but return to Colorado for one month to do a consulting job, the income earned while working in Colorado is subject to Colorado tax (even if you are not a Colorado resident).
Planning is the Key
As mentioned before, unless you live in one of the “Great Seven”, you are better off leaving your residency behind. To do this (and be able to prove it), you should come up with a plan and execute it diligently. This will likely take several months to do and you may want to consult a tax advisor.
For instance, if you are moving overseas, you should consider moving your residence to one of the “Great Seven” before you move. But it is not enough to spend a few weeks in one of those States and then move overseas. Ideally, you will be in the new State for several months (or even a full year) and have evidence that you established residency in the new State.
I hope you found this helpful. For more information on this and other topics:
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