Sunday, 3 July 2011

State Tax Filing Requirements for Expats

Which States in America Require Expatriates to Pay Income Tax?

State tax is due from all US citizens living abroad who have legal residence in states requiring its residents to pay taxes. Learn the exceptions to this rule.

Do expats have to pay state taxes? One of the main rules to consider in this many faceted question is whether the expat intends to return to their state of prior residency. Working overseas temporarily or for a few years would imply that the resident will return to the home state and thus owe tax, if the home state of record requires tax filing. A show of one intending not to return would be giving up their driver's license, bank accounts and home properties in the state.


What Changes Should Expats Make?

It is good to change the mailing address and bank accounts to a non-tax state listed below, if the expat wants to avoid paying tax. Some states have made it easy for expats to not owe any state tax when they have been gone for more than six months. States that do not require state tax of course do not require a form, but states like California, Virginia, South Carolina and New Mexico make it much harder on its residents to eliminate all taxes being filed when abroad.

It is best to check with each individual state to check on the exact ruling for each state. Also consult a tax attorney before making a decision to move overseas either


Which States Require its Residents to Pay State Income Tax?

Residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not have to pay state income tax. All other states require its residents to file a tax return and pay what is owed. New Hampshire and Tennessee will tax only dividend and interest income.


Taking the Allowed Foreign Earned Income Exclusion

There is for 2010 a foreign income exclusion of $91,400. This amount applies to self-employment and regular earnings made while overseas. This amount must be earned while residing overseas for a full calendar year and must indicate that the expat was not in the US for more than 35 days during the fiscal year. On a joint return this amount is taken by both spouses.

Nick Hodges, president of NCH Wealth Advisors, said "Another big mistake people make is believing that they don’t have to file a tax return if they don’t make more than the foreign earned income exclusion. You can only take the exclusion by filing a return. If you are caught for not filing, you may not be allowed to use the exclusion,” he advised.

The United States has treaties with more than 35 countries where they can find the tax status of its US citizens. If they can find out the tax status of US citizens residing in those countries, they can also share information they have.

According to CPA Max A. Koss, director of international tax services for Frost, PLLC, in Raleigh, N.C., “If you are earning income in another country, in many cases that country wants to tax that income. If the tax rate is almost the same as you would pay in the United States, you want to consider what meets your goals. The foreign earned income exclusion may not be as valuable as it sounds.”

Being a resident of California does not mean that California is the legal tax home or residence. The tax residence may be Costa Rico. Using the home in Costa Rica may be a tax deduction for business purposes or it may be just a home of record. Knowing the difference between investment income and actual income is the key in filing all tax returns properly. This tax law is very complex and hard for many to understand clearly, and should only be interpreted by a tax attorney or CPA.


Becker, Hazel (March 31, 2009) "Living Abroad: Expat Tax Rules" nuwireinvestor.com
"Seven Important Tax Tips for American Citizen Expatriates" taxmeless.com

Photo courtesy of Photobucket:  mtra1723