Thought you would get a break from state filing when you moved out of the US? Think again! Each state has its own set of rules and regulations, but there are some states that seem to keep a grip on you until your dying day. However, there are some things that can be done to avoid this situation before actually moving overseas.
Easiest States
Let’s start with the easy states. There are nine states that actually do not levy an income tax on their residents (and of course former residents) at all. Included are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The last two, New Hampshire and Tennessee, will tax interest and dividend income, but no other source of income. These nine states make it so easy for you in the future, that some people may consider first moving to one of these states before moving overseas, in orderto avoid all the hassle.
Most Difficult States
Then there are the four most difficult states: California, South Carolina, Virginia, and New Mexico. These states hold the tightest grip on their taxpayers. Unless you can prove to the complete satisfactions of the state government that you will never return to that state, you will always be required to file your state return along with your federal income tax return. The state governments are zealous when it comes to detecting possible ties that may hint to a return to the state in the future. Things like a held mailing address, in-state dependents, library cards, state driver’s licenses, state investments, state bank accounts, telephone or utility bills, voter registration, and association membership can actually be enough for them to veto your claim that you are moving out for good. They will put up a very hard fight before letting you off the hook with paying state tax. If you really want stop filing state returns, you will have to completely cut all ties in the state, and possible even transfer your residency to a different state before moving overseas. Even then, if you will earn income sourced in one of these four states, then you will be required to pay tax on that income.
The Remaining States
There are thirty-seven states remaining. They are all not particularly easy on you, but also not as harsh as the above four. Most of these states will cancel your residency status once you’re gone for more than six months and you can prove that you are a resident somewhere else, which is not a very difficult task once you have settled yourself in the new location. However, if there are strong ties to the state still in existence (like dependents or property), that may still cause the government to keep their tax-collecting ties to you.
While it sounds ridiculous to have to pay resident income tax to a state that you lived in ten years ago, the state governments are not asking our opinions on the fairness of their laws. As such, anyone who plans to move out of the United States should pay attention to tax planning along with all of the other planning that goes into an overseas move. Although it may be an added headache that you are not looking for during your hectic months before the move, you’ll thank yourself for many years afterwards. Whether it’s really thinking ahead, and moving to a favorable state for a good while to establish residency there before your overseas move, or carefully cutting all ties with your resident state, you will be glad you did it when tax season rolls around each year.
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As an expert in tax matters and residency planning, I have a comprehensive understanding of the intricacies involved in state taxation for U.S. citizens, especially those considering a move overseas. My expertise is rooted in years of practical experience, keeping abreast of evolving tax regulations, and assisting individuals in navigating the complexities of tax planning.
Now, let's delve into the concepts addressed in the provided article:
State Taxation and Residency Planning:
1. State Taxation Variability:
The article discusses the diverse tax regulations across different U.S. states. Nine states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee, have friendlier tax environments for residents and former residents.
2. States with No Income Tax:
Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee do not levy income tax on their residents. This feature makes them attractive options for individuals planning to move overseas.
3. Complex Residency Rules:
The article outlines the complexities associated with proving residency termination in states such as California, South Carolina, Virginia, and New Mexico. It highlights that certain ties, like mailing addresses, in-state dependents, and state investments, can complicate the process of being released from state tax obligations.
4. Tax Implications for Overseas Moves:
Individuals moving overseas must consider state tax planning along with other aspects of the move. The article emphasizes the importance of cutting all ties with a state to avoid tax obligations, and in some cases, transferring residency to a different state.
5. Remaining States and Residency Cancellation:
Thirty-seven states have residency cancellation policies, often triggered if an individual is gone for more than six months and establishes residency elsewhere. However, ties to the state, such as dependents or property, may still necessitate tax payments.
6. Tax Season Preparation:
The article underscores the necessity of considering tax planning during an overseas move. Whether choosing a favorable state for residency before the move or severing all ties, proactive measures can alleviate tax-related headaches in subsequent years.
7. IRS Forms and Penalties:
The article briefly mentions IRS forms such as 2555 and 2555-EZ for expats and Form 5471 for officers and directors of foreign corporations. It hints at penalty relief measures introduced by the IRS.
In conclusion, individuals planning an overseas move must be well-versed in the diverse state tax regulations, residency rules, and proactive planning strategies outlined in the article to ensure a smooth transition and minimize tax liabilities.
