Living abroad as a U.S. citizen brings unique financial responsibilities, especially when it comes to taxes. While many expats are aware of their federal tax obligations, state taxes often cause confusion. Understanding how your home state’s tax laws apply to you, even while living abroad, is essential to staying compliant and minimizing unnecessary costs.
A common question is: Do expats pay state taxes?
The answer is that it depends. Generally, whether or not you owe state income tax depends on your prior state of residence and how successfully you have severed your ties to that state. Each state has its own definition of residency and its own filing requirements. Some states are relatively lenient and allow expats to terminate residency after a certain time abroad. Others—like California, New Mexico, Virginia, and South Carolina—are more aggressive in maintaining tax ties to former residents.
This guide will walk you through how state taxes affect expats, the rules around tax residency, potential exemptions, penalties for noncompliance, and how strategic tax planning can reduce your overall liability.
State Tax Residency Rules for Expats
State tax residency determines whether a U.S. expat must file and pay state income taxes. Residency is generally based on physical presence and intent. Many states consider you a resident if you maintain a domicile—your permanent legal home—even if you’re living abroad.
Residency is typically evaluated by:
- Time spent in the state
- Property ownership
- Voter registration or driver’s license
- Mailing address
- Family or business ties
For example, if you maintain a home in California and return occasionally, the state may still consider you a resident—even if you live overseas for most of the year. By contrast, a state like Illinois may allow you to terminate residency after six months abroad if you can prove you no longer maintain significant ties.
To formally end state residency, expats may need to:
- Sell or rent out their home
- Relinquish state-issued IDs
- Register to vote elsewhere
- Update mailing addresses and sever other personal ties
Understanding Dual Residency Tax Issues
In some cases, expats may face dual residency issues—being taxed by two different states or by both a state and a foreign country. This usually happens when you move abroad but haven’t formally ended your residency in the U.S. state.
States don’t typically recognize foreign residency the same way the federal government does. As a result, you may be considered a resident of both your U.S. state and your new foreign country. In such cases, expats could face double taxation.
How to reduce this risk:
- Officially terminate state residency by following state-specific procedures.
- Consult a tax professional to coordinate timing of moves and paperwork.
- Keep detailed records showing your intent to reside abroad permanently.
State Tax Exemptions and Benefits for Expats
While there’s no universal exemption from state income tax for expats, many states offer favorable provisions. If you prove you’ve broken residency, you may no longer be liable for state income tax. However, some states still require a return if you earn income tied to the state.
States with no income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
These states don’t tax income at all, so if you last lived in one of them and haven’t moved elsewhere in the U.S., your state tax obligation is generally nonexistent. Relocating to one of these states before moving abroad can be a smart planning move for expats looking to eliminate future state filing requirements.
States taxing only dividends and interest:
- New Hampshire
- Tennessee
These two states have limited income taxes focused only on certain types of passive income. If your income is primarily from employment or self-employment abroad, you may not have to file a return depending on your specific circumstances.
Exemptions you may qualify for as an expat:
- Foreign Earned Income Exclusion (FEIE): This federal exclusion allows qualifying expats to exclude up to a certain amount of foreign-earned income from federal taxes. Some states, like New York, conform to the federal rules and allow the FEIE to apply at the state level. Others, such as California, do not.
- Rental income exclusion or deductions: If you rent out a home in your former state, some states may allow you to deduct related expenses, reducing your state taxable income. Be aware, though, that rental income is often considered a continuing tie to the state.
- Foreign tax credits: While these credits are primarily used at the federal level, a handful of states allow partial or full credits for taxes paid to a foreign country, helping you avoid double taxation.
Other possible state-level benefits for expats include:
- Part-year resident tax treatment: When you move abroad mid-year and establish non-residency, most states allow you to file as a part-year resident, which may lower your overall liability.
- No filing requirement under income thresholds: Like the federal system, many states don’t require a tax return if you earn below a certain threshold, even if you’re still considered a resident.
Ultimately, the benefits and exemptions available to expats vary significantly from state to state. Some states actively conform to the Internal Revenue Code (IRC), while others decouple from it, meaning they ignore certain federal provisions like the FEIE. Understanding how your specific state handles expat taxation is crucial to minimizing liability and staying compliant.
Be sure to check each state’s treatment of these credits and exclusions—some are more generous than others and failing to claim available exemptions can lead to overpayment or unnecessary filings.
Tax Implications of Moving Abroad
Becoming an expat doesn’t automatically end your tax obligations to your home state. If you relocate internationally, you must take active steps to sever residency.
Key factors affecting your state tax liability post-move:
- Whether you continue earning U.S. or state-based income
- Whether you maintain a home in the state
- Whether you maintain personal, business, or financial connections
- The presence of dependents or immediate family in the state
Many states use a “facts and circumstances” test to determine if you’re still a resident. Simply living abroad isn’t always sufficient to eliminate your tax obligations.
Tax planning tips before moving abroad:
- Move to a no-income-tax state before leaving the U.S.
- Cancel your voter registration and driver’s license in your current state
- Establish residency in a new state (even briefly) before going abroad
- Consult with an expat tax expert to help you with timing and documentation
If you’re unsure whether you need to file state taxes while living abroad, it’s best to review your previous state’s filing rules or work with a qualified CPA.
State Tax Penalties for Expats
Failure to file state tax returns or pay owed taxes can lead to significant penalties—even while living overseas. Some states are aggressive in pursuing back taxes and may tack on penalties and interest.
Common penalties include:
- Late filing penalties
- Late payment penalties
- Interest on unpaid tax balances
- Loss of deductions or exemptions
California, Virginia, and New Mexico, for instance, have strict rules about proving non-residency and have been known to audit former residents living abroad.
How to avoid penalties:
- Determine if your former state is one of the more aggressive states.
- File a final part-year resident return the year you move abroad.
- Proactively notify your state of the change in residency.
- Avoid earning income from that state unless necessary.
- Work with a CPA who understands the intricacies of expat state tax law.
Expat Tax Planning and Financial Strategies
Proper tax planning is critical for expats looking to minimize their state tax liabilities. Each expat’s situation is unique, but there are universal strategies that can benefit most Americans living abroad.
Smart expat tax strategies include:
- Use the Foreign Earned Income Exclusion (FEIE): This allows qualifying U.S. citizens abroad to exclude a substantial portion of their foreign-earned income from federal taxation. It may also reduce your state liability if your state recognizes the exclusion.
- Take advantage of Foreign Tax Credits: Especially helpful if your host country taxes your income. These credits can prevent double taxation and may reduce your state taxes if the state allows for them.
- Open tax-advantaged accounts abroad: Contributing to retirement accounts or savings plans in your host country may offer local tax benefits but be mindful of U.S. reporting rules such as FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act).
- Time your moves strategically: Consider relocating toward the end of the tax year to take advantage of part-year residency rules and reduce your liability in the year of your move.
- Coordinate with your spouse: Depending on your combined income and residency statuses, it may be more beneficial to file jointly or separately. This strategy can influence tax brackets and available deductions at both the federal and state levels.
Financial planning tips:
- Avoid maintaining property or investments in your former state unless necessary.
- Consider transferring ownership of state-tied income streams.
- Ensure all address updates are made with banks, employers, and agencies.
Some expats choose to relocate to a tax-friendly state before leaving the country permanently. Others create formal declarations of non-residency and submit them to their former states.
Simplifying State Tax for Expats
Managing your state tax obligations as an expat doesn’t have to be overwhelming. The key is to understand your former state’s residency requirements and take proactive steps to end your tax ties when possible. If you’re unsure whether you still owe taxes, it’s always best to seek professional guidance.
Here’s what to keep in mind:
- Each state has different rules about tax residency.
- Some states make it very difficult to break residency.
- Filing a state return might be required even if you live abroad.
- Failing to properly sever ties can result in double taxation.
- Strategic planning before moving can save thousands.
If you’re wondering whether you must file state taxes living abroad, the answer often depends on how effectively you’ve broken ties with your previous state.
Working with a tax professional can provide clarity and reduce stress. At Expat CPA, we specialize in helping expats navigate state taxes and ensure they remain compliant.
Get Expert Help With Your State Taxes
Not sure if you need to file a state tax return while living overseas? Let the experts at Expat CPA help you determine your filing requirements and minimize your tax burden. We offer a dedicated State Expat Tax Return Package for just $175 per state.
Schedule a free consultation today to take the guesswork out of your state taxes.