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 order to 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.
