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As an ExPat, do I need to file a State tax return?

Article ID: 46
Last updated: 12 Nov, 2014
Revision: 5
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By Jason Watson ()

Perhaps. This is an extremely sticky wicket. Generally speaking if you intend to return to the state that you resided in just prior to moving overseas, that state is going to claim you as their resident during the entire time you are abroad. Think of this way- to be a United States citizen for tax purposes, by definition you must be domiciled in a state (there are exceptions of course).

States are getting more and more picky (down-right nasty, frankly) about foreign earned income exclusions. If you maintain a state address, a state-issued drivers’ license, financial accounts, property ownership and / or voter registration status, you will be deemed a resident of that state while living abroad. An underlying theme in the foreign earned income exclusion is the spirit of your intentions- the IRS will examine everything to determine your intent, and states will do the same.

Two extremes- Texas (among other states) does not have an income tax. California does not recognize a foreign earned income exclusion on the state level- in other words, all your foreign income will be taxed at the California level even if it is excluded at the Federal level. Yuck.

In addition to California: Massachusetts, New Jersey, and Pennsylvania also do not recognize the Foreign Earned Income Exclusion.  And the law is muddy when it comes to Maryland.

Several states fall in between. It might be to your advantage to become a resident of an income-tax free state such as Texas, Wyoming, South Dakota, Florida, etc. prior to your international assignment.

Lastly, just because you own property as a rental in a state does not necessarily mean you are a resident of that state. For example, you might have a rental home in California requiring a non-resident tax return and be a resident of Texas. You will only report the rental income or loss on your California tax return since you are a non-resident who only owns business property there, while declaring Texas your state of residency for state income tax purposes and living in London. Say that ten times fast.

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Also read
item What is foreign earned income exclusion?
item What is a tax home or abode, and how do they relate to each other?
item May I deduct contributions to foreign charities?
item What are the filing timelines for submitting my ExPat tax returns?

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