If your home state is Texas, Florida or Nevada, Congratulations! You can stop reading right here and go back to more fun stuff. You don’t have to worry about state income tax for expats. The same is true for nomads originating from Alaska, South Dakota, Washington and Wyoming.
If you are from California or Virginia however … Sorry! Your nomad tax situation is much more complicated.
Your home state matters when it comes to tax, even if you don’t live there anymore!
There are three general types of states when it come to state taxes for expats: the easy ones, the sticky ones, and the somewhat neutral ones.
The easy states
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t have individual income tax.
Tennessee and New Hampshire collect state taxes on interest and dividends but not on ordinary income. That makes them also fairly easy for expats.
The sticky states
Virginia and especially California are not the best states to call home when you are actually rarely home. California does not allow you to exclude foreign earned income from your state taxes. And California’s state tax rate is one of the highest in the US.
New Mexico and South Carolina round out the sticky states for nomad income tax. Not only do you have to pay state tax on your income. What makes these four states “sticky” is that they try hard to hold on to their residents and they make it very difficult to leave.
To avoid having to pay state income tax in those states you have to move away and prove to the state that you moved permanently to a different state. The burden of proof lies with you. So if you have any intention of moving back to your state, you may have a hard time proving otherwise. Read more below on how to deal with that.
The neutral states
The remaining states are neither easy nor sticky. Some will let go of you as a tax resident if you have gone for a certain period of time. You still may have to prove your new residency to leave the state taxes behind, but requirements are less stringent as for the sticky four.
Why should you even care about state tax?
You might think that thinking about state tax is overthinking it. How would the state even know about you after you left and stopped filing tax?
Well, if you after a few years of travel return to your state, have income there and start again to file a tax return they will see the gap in filing. If you can’t prove that you were a resident elsewhere, your old home state will likely want you to pay taxes for those missing years.
If in doubt, it is better to file a state return declaring that you are residing abroad than not filing at all.
What you can do about expat state taxes
I’m all for paying your fair share of taxes and would never advocate evading taxes. Just the thought of paying tax to a state that you don’t spend much time in, when other states can function without doing that, doesn’t seem appealing.
Of course you can move to an easier state with no state income tax. If you are coming from a sticky state, this move will not be easy though.
Let’s say you want to move from California to Nevada. It takes more than just changing your mailing address and declaring yourself a non-resident in CA. You need to physically move to and live in NV, with the intent to remain in NV indefinitely (what an antiquated concept, I know). If you just move and intent to stay in NV for a limited time, even if that is a long limited time, your “domicile” does not change and remains in CA.
“Domicile” is the term used to describe where you have to pay taxes. Domicile is the fixed and permanent place where you live and/or intend to return to after an absence. You can only have one domicile at a time. The catch is that your domicile remains the same until you acquire a new domicile. That means leaving your home state and traveling the world will not change your home state because you did not make a new fixed and permanent place your home.
It all comes down to intent. While intent is a very subjective notion, there are ways to show your intent to the tax authorities by taking the right actions. Typically, tax authorities look at what ties you have to a state, for example where you have your primary home, your doctor and dentist, bank, accountant etc.
Should you move before becoming a nomad?
If you have no real ties to another state with no or lower taxes, it makes sense to move before embarking on a nomadic life. This is however not a quick fix. It can take time and a lot of paperwork to do it right.
If you have family, property and other connections in your home state, those may outweigh any financial considerations, or in the case of sticky states make it hard to prove your intentions to move away with no plans to return.
State tax can be costly, and every state has different rules and requirements. To avoid issues, it’s best to get advice from a tax professional for your specific situation.
