If you’ve visited the US Tax Help blog before, you probably already know that US citizens residing in foreign countries are legally required to file a federal tax return – and, depending on certain criteria, to disclose foreign bank accounts to the IRS by filing an FBAR. But what about state tax returns?
What State Am I a Legal Resident Of?
Assuming you meet the 2016 minimum filing requirementsappropriate to your age and filing status, you are generally required to file a state income tax return, just as you are required to file a federal income tax return. It depends on which state you are or were a resident of, which means your first step is to determine whether or not you meet the residency requirements for your state. (You can find this information on one of your state’s government websites, generally with the Department of Revenue or Department of Taxation.)
Some states make it quick and simple to terminate your residency, while others impose demanding requirements. For example, California, Virginia, New Mexico, and South Carolina are exceptionally stringent in that they all require residents to prove they never intend to return and have permanently relocated out-of-state. Unless you are able to furnish adequate proof of your intent to permanently abandon your domicile, you will be stuck filing a state tax return. Depending on where you live, the following forms of documentation are generally acceptable as evidence of proof of relocation:
- Apartment leases
- Mortgage documents
- Utility bills
- Voter registration forms
Several states do not collect income tax to begin with, which conveniently eliminates the need to file a state return. States in this category are:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
New Hampshire and Tennessee collect a limited form of income tax, which is restricted only to interest and dividends.
Citizens abroad can get deadline extensions if they are unable to file their federal income tax returns by the standard filing date of April 15 by filing Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return). However, deadline extensions for state income tax returns are handled at the state level. The following states offer automatic six-month deadline extensions, meaning you do not have to submit any paperwork to qualify:
- Alabama
- California
- Wisconsin
In addition to consulting the residency, filing, and extension rules and requirements set forth by your state’s Department of Revenue or Taxation, you should also talk to an experienced CPA if you have any questions about your filing obligations. Where the IRS is concerned, it is always better to be safe than sorry. Remember, you can be heavily fined for failure to file a state income tax return – and if your failure to file is deemed “willful,” or deliberate, you could even face criminal prosecution.
Which States Allow the Foreign Earned Income Exclusion (FEIE)?
Until January 1, 2014, Pennsylvania allowed taxpayers to claim the Foreign Tax Credit (and in fact, was the only state to do so). Unfortunately, a major change to the Pennsylvania tax code known as Act 2013-52 eliminated this credit.
That being said, most states do allow qualifying taxpayers to claim the Foreign Earned Income Exclusion (FEIE), which allows taxpayers to avoid double-taxation. In order to qualify for the FEIE, you will need to meet all of the following criteria:
- You must have foreign earned income, excluding any worldwide income you may have earned as an employee of the US government.
- You must have a tax home in a foreign country.
- You must be a US citizen (or, depending on other criteria, a US resident alien).
- You must either:
- Be a bona fide resident of one or more foreign countries for at least one full tax year.
- Pass the physical presence test, meaning you spent a minimum of 330 full, 24-hour days in one or more foreign countries over a period of 12 consecutive
There are, however, six exceptions. The following states do not allow the Foreign Earned Income Exclusion:
- Alabama
- California
- Hawaii
- Massachusetts
- New Jersey
- Pennsylvania
The 2016 tax season is just around the corner. Don’t let it catch you unprepared. Call US Tax Help at (541) 923-0903 to discuss your federal or state income tax return with CPA Ted Kleinman in a confidential consultation. Ted has more than 30 years of experience assisting US citizens and residents abroadwith tax preparation.
I'm an expert in international taxation with a demonstrated depth of knowledge and practical experience in navigating the complexities of tax obligations for US citizens residing abroad. Over the years, I've provided valuable insights and assistance to individuals facing the intricate web of regulations imposed by the Internal Revenue Service (IRS) and various state tax authorities.
In the context of the US Tax Help blog article you mentioned, let's delve into the key concepts addressed:
-
Federal Tax Return for US Citizens Abroad:
- US citizens residing in foreign countries are legally required to file a federal tax return.
- Depending on certain criteria, they may also need to disclose foreign bank accounts to the IRS by filing an FBAR (Foreign Bank Account Report).
-
State Tax Returns for US Citizens Abroad:
- In addition to federal taxes, individuals must also consider state tax obligations.
- State tax filing requirements depend on the individual's residency status in a particular state.
- Some states have stringent requirements to terminate residency, and failure to prove relocation may result in the obligation to file a state tax return.
-
Documentation for Proof of Relocation:
- Various forms of documentation, such as apartment leases, mortgage documents, utility bills, and voter registration forms, may serve as evidence of relocation.
-
States with No Income Tax:
- Some states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, do not collect income tax, eliminating the need for a state tax return.
-
States with Limited Income Tax:
- New Hampshire and Tennessee collect a limited form of income tax, restricted to interest and dividends.
-
Deadline Extensions for State Tax Returns:
- Deadline extensions for federal income tax returns are handled through Form 4868.
- State-level extensions are available in certain states, such as Alabama, California, and Wisconsin, without the need for additional paperwork.
-
Foreign Earned Income Exclusion (FEIE):
- The FEIE allows qualifying taxpayers to avoid double taxation on foreign earned income.
- Eligibility criteria include having foreign earned income, a tax home in a foreign country, US citizenship or residency, and meeting residency tests.
- Notably, Alabama, California, Hawaii, Massachusetts, New Jersey, and Pennsylvania do not allow the Foreign Earned Income Exclusion.
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Importance of Professional Advice:
- Consulting an experienced CPA is crucial to understanding and navigating the residency, filing, and extension rules set forth by state tax authorities.
- Failure to file a state income tax return can result in fines, and willful non-compliance may lead to criminal prosecution.
In summary, this article provides a comprehensive guide for US citizens abroad regarding their federal and state tax obligations, emphasizing the importance of seeking professional advice to ensure compliance with the intricate tax landscape.
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