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Wondering if you need to file and pay state taxes as a US American abroad? Read below!
By Nathalie Goldstein, CEO of MyExpatTaxes
Building your life overseas, adjusting to the new culture (maybe even a new language), and navigating your way in a foreign land can be overwhelming. That’s why US federal, let alone state taxes are probably the last thing on the mind of an American abroad. Most know about their annual obligation to file federal US taxes, regardless of where they reside, but state taxes can be a rather unpleasant surprise.
To sum up state taxes - these are additional income taxes that go to the US state you mostly lived in prior to moving abroad. If the US state you previously lived in doesn’t charge income taxes (like Washington), and you don’t work from the states – you’re probably in the clear! If that’s not the case though, you’ll need to make sure you understand residency and state taxation laws.
You may be asking: Wait - I might have to pay state taxes as an American abroad? Our answer: It depends if your home state back in the US believes you’re still a resident or not.
The need to file a state tax return is determined by three factors:
★ Your domicile (legal residence) abroad being legit / believable enough for the IRS.
★ If you still maintain or have an abode (permanent residence) in your former US state.
★ If you are making income in your state (or other US states) and thus have state sourced income, which you owe state taxes on.
Here is a detailed walk-through to determine if you need to file a state tax return while living as a US American abroad:
Your legal residence is a domicile, and if you’re a US American expat, it’s important to have evidence that you have established a residence abroad. This is not just for the IRS, but also for the state you’re leaving behind.
4 common ways you can prove that you are legally residing abroad include:
★ Having a rental lease or housing contract in your name from the foreign country you’re living in
★ Signing up / registering your new home at the local city office in the foreign country
★ Having a driver’s license from the foreign country (international driver’s license don’t always count)
★ "Indefinite" or "close to indefinite" long-term visa (study abroad or 1-year work visas don’t always count)
An abode is a building or structure where you can live, and permanently maintain for year round use - whether you own it or not. Thus, if you’re maintaining a home in the US while living abroad, you still may be obligated to file state taxes.
For example, you can be living in Bangkok with an apartment in San Francisco that you turned into an AirBnB, which you are receiving rental income from to fund your life abroad.
By still “having” a home in San Francisco you’re giving the state of California a reason to believe you’ll be returning and that living abroad is just a phase. So from that, you will need to file a state tax return declaring your worldwide income as an American abroad. And no, they do not accept the Foreign Earned Income Exclusion.
State Income Check:
The source of your earned income is the place where you perform the services for which you received the income. Let’s look at two different scenarios to see how income sourcing works:
1. You work for a Silicon Valley start-up but you’re based exclusively out of Germany. You travel to California a couple times a year for vacation, but never for work. All your income from this start-up can qualify as being foreign sourced. (If you’re also considered a non-resident in California, then you only have to worry about your federal tax return!)
2. Same Silicon Valley start-up, but because of the issues caused from the time difference, they want you to work out of their HQ for 2 weeks every fiscal quarter. That daily income earned during your time working out of the California office is now California sourced. So even as a non-resident, you need to file a state tax return to pay your share to the California Franchise Tax Board.
It’s a lot of info to process, so I get it. Taxes can be a complicated and stressful thing to understand - let alone actually doing them as an American abroad. That’s why my team and I at MyExpatTaxes can help you with your federal taxes and let you know if you have a state tax reporting obligation without revolutionary expat tax software. It was created for the 9 million Americans abroad and is user-friendly software, plus allows you to get your taxes done smoothly, affordably and in under 30 minutes.
Click Here to read Nathalie's Interview with The American magazine about living as an American overseas and setting up the MyExpatTaxes software.