Tax Tips for U.S. Americans Abroad
Do US citizens living abroad need to file state taxes? Maybe. We’re pretty sure these types of taxes as an expat are the last thingon your mind. As an American expat, you’re too busy adjusting to the culture and navigating your way through the foreign country you now call home!
At this point you’re probably thinking…wait I might have to pay state taxes as an expat too? We say it depends on if your home state believes you’re still a resident or not.
How Residency is Determined for State Taxes
The need to file a state tax return is mainly determined by three factors:
- The legitimacy of your domicile (legal residence) abroad (meaning, your place abroad should be legit and believable for the IRS)
- If you maintain or have an abode (permanent residence) in your former state
- If you are still making income in your state and thus owe state taxes as an expat
We’ll walk you through these three factors more specifically…
Domicile Check ✓
A domicile is your legal residence, and if you’re a US citizen moving abroad, it’s important to have evidence of the established domicile abroad for yourself, the state you’re leaving, and the IRS.
How can you prove you legally reside abroad?
- Rental lease or housing contract in your name
- Signing up as a resident in the local city office
- Driver’s license from your new country (temporary international ones don’t count)
- “Indefinite” or close to “indefinite” visa (not a 3-month study abroad or 1-year work visa)
Abode Check ✓
In general, a permanent place of abode is a residence (a building or structure where a person can live) that you permanently maintain, whether you own it or not, that is suitable for year-round use.
How can you maintain a “place” without owning it? Well, for example, you could still be hanging onto your Manhattan New York City rental while also making some extra income off of Airbnb…
So if you maintain and/or own a permanent home (abode) in the US while living abroad, you may have to file state taxes as an expat.
Why? Because if you still have a “home” in New York then you’re giving them (New York State) a reason to believe you’ll be coming back, and that this whole moving-abroad-thing is just a “phase”. Hence you’re still in a “relationship” with your state and need to file state taxes as an expat!
A permanent place of abode is:
Alex owns a home with a beachfront view (great for you Alex!) The home includes a kitchen and bathroom and is suitable for year-round use. Therefore, it is considered a permanent place of abode.
Even if Alex only spends time there during his annual one week surf vacays, it’s still considered a permanent place of abode. Which means, Alex, owner of this beach home back in the states, may have to file state taxes as an expat.
A permanent place of abode is NOT…
Mara owns a cabin in the mountains. The cabin is only suitable for use during the warmer months of the year because it does not have adequate insulation or heating for winter use. Only Eskimos could live there during Christmas but even then, they’re cold!
Therefore, it is NOT considered a permanent place of abode because the residence is not suitable for year-round use. So Mara, on the other hand, is probably off the hook for filing state taxes as an expat.
State Income Check ✓
Some common beliefs:
“All income is in a foreign currency that is deposited in a foreign bank account… therefore only foreign income is earned so no federal or state taxes as an expat!”
“The foreign earned income exclusion (FEIE) tax benefit is awesome if you make less than $100K USD a year since can exclude EVERYTHING and no federal or state taxes as an expat!”
Not completely wrong, but not completely right either…
Two major concepts you’ll need to learn regarding earning income taxes as an American abroad:
Earned income: Typically paid for personal services performed, such as wages, salaries, or professional fees aka, the income you actively earn. What the IRS defines as earned income usually includes:
- Salaries and wages
- Professional fees
Unearned income includes items such as gambling winnings, capital gains, interest & more. One could argue that they worked hard for this income and thus, it should be classified as “earned” but that’s a different discussion.
Now the complex part… Coming back to your Manhattan Airbnb income stream… Rental income, business profits, royalties, etc. are defined as variable, which means it depends (!) on your specific situation if it can be excluded under the FEIE tax benefit as earned or cannot be excluded as unearned income.
How is income sourced:
Circling back to the focus of this blog: Do US citizens living abroad need to file state taxes? Let’s now ask: Where is your income sourced? And if it’s sourced from the US, will you need to pay state taxes as an expat?
The source of your earned income is the place where you perform the services for which you received the income. Let us give you an example…
Alex (the surfer above) works for a Hawaii surfing company as a full-time software engineer. Whenever he is working for the Hawaiian company, he is abroad – and he never has a business trip in the US (why is that important – find out here).
Thus, Alex’s sourced income is foreign, because he is performing his services abroad. So his income can be excluded up to a certain amount with no implication of Hawaii state taxes as an expat…Nice!
The source of your unearned income is not as easily defined in the books, but generally… Your Manhattan rental income? Yeah, New York will claim that as their property, because you’re generating income from people renting your space in NY. Therefore all income produced by that property is sourced as NY income.
So even though you’re managing everything online from your ski cabin in Switzerland, you better bet that if you’re making over the state income filing threshold, you need to be filing and paying a state taxes as an expat along with your annual federal return (due no matter what!).
Need to File State Taxes?
We know US taxes can be a complicated and stressful thing to do and understand, especially when living abroad. So we understand how filing federal and state taxes as an expat can be a lot to handle.
It seems like all the tax software solutions out there forgot about us American expat taxpayers and personalized services want to charge us upwards of $500 – $800 just to file! This is why we founded MyExpatTaxes because WE KNOW that moving abroad is hard enough, but your taxes shouldn’t be… our special expat tax software allows you to plug in your info and numbers in under 30 minutes and receive the files you need to finish effortlessly.