One of the largest myths regarding expats is that when Americans move away, they assume their tax obligations stop at the state level. You’re living in another country, so surely your home state has no claim on your income, right? Unfortunately — that is far from the truth. Many states are notorious for holding onto taxpayers long after they’ve left. If you don’t take the right steps to cut ties, you could still be on the hook for state taxes while living abroad.
The Myth: Moving Abroad Ends State Taxes
Federal taxes are universal for U.S. citizens, meaning, regardless where your home state was, you’re required to file a federal tax return on your worldwide income. However — state taxes depend on residency rules. The reality is that the states don’t base residency purely on where you sleep at night. They look at your domicile, or your permanent home in the legal sense, not so much your temporary residences.
The “Sticky” States That Don’t Let Go Easily
Not all states tax worldwide income, and luckily not all states aggressively go after expat taxes. However, some are known more than others for their strict rules and residency standards to maintain tax ties, including:
- California: Perhaps the most strict, they consider everything from where your family lives to any memberships you pay for.
- New York: A “statutory residency” test can trigger taxes even if you only spent a little bit of time there.
- Virginia: They assume residency if you maintain a home, driver’s license, or voter registration.
- South Carolina: With a strong focus on intent, if the state thinks you plan to return at any time, you’re taxable.
- New Mexico: NM taxes residents on worldwide income and is very difficult to break ties with.
What Keeps You Tied to a State?
What is considered an element of connection varies from state to state, but generally they follow the same elements as Virginia.
- Owning or renting a home
- Keeping a spouse or dependents in the state
- Maintaining a driver’s license or vehicle registration
- Voter registration
- Bank accounts or investment accounts
- Frequent returns for visits or work
Each of these ties adds weight to the argument that your “domicile” is still in that state.
How to Break Residency
To minimize the risk of state tax liability, expats need to actively cut ties with their home state. Some common steps include:
- Sell or rent out your home: That way it’s no longer available for your use. Consider selling it or renting it commercially.
- Update legal documents: Vehicles, insurance, driver’s license, mailing address, etc. You can make these changes in your local government offices and/or online.
- Cut unnecessary memberships or local ties: Gyms, clubs, local businesses. If you continue to have relationships with local businesses, the state can assume you’re still partial residency.
- Document your move: Keep proof of your residence abroad (address, utility bills, visas). In the case that you are required to pay taxes, you will have proof that you’re actively removing yourself from them.
By removing yourself from any attachments, the less viable reasons they have to tax you.
Why It Matters
Simply moving abroad doesn’t break you away from your home state, and unfortunately, the any taxes due will catch up to you. It’s important to ensure you have a clean break from your previous residency to avoid facing double taxation (paying federal, state, and foreign taxes). Understanding the behind the scenes of how your move will affect your tax status is something that you’ll want to keep in the forefront of your mind. If you’re planning an international move, taking all of these key components into consideration will save you the stress and headache later.
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