How to Determine Residency for Tax Purposes as a U.S. Expat
Living and working abroad can be the fulfillment of a dream or just a great way to advance your professional career. However, living abroad requires planning and foresight when dealing with taxation issues. If you are a United States citizen living overseas, your worldwide income is subject to federal income tax. Additionally, you will have a tax liability in your state of residence. However, that depends on whether you are maintaining a residence in your home state or have established your residency overseas. Our tax experts at US Tax Help will review how residency status is determined and its tax consequences below.
Determining Residency for State Tax Purposes
United States citizens living and working abroad are required to file a federal tax return. This is the case no matter where they have established their residency – federal income tax is based on citizenship, not where you call home. However, state income tax works differently. For U.S. expatriates, whether they are required to file a state tax return is determined by three main factors.
The first factor to consider is whether you have established a legitimate foreign domicile. This means that the IRS recognizes where you are living as your legal domicile for tax purposes. The next consideration is whether you maintain an abode in your home state. Finally, the government will look to see if you are still earning income sourced in your home state, such as rental income or investment accounts. Below, our US Tax Help expert looks at each factor in more detail.
Defining Domicile Residency
Your domicile is your legal and taxable residence. If you are a United States citizen, you need evidence to prove you have established your domicile overseas. Some proof that you could use includes having a housing contract or lease in your name in a foreign location. Additionally, you could provide evidence that you have signed up as a resident of that location with the local authorities. While a temporary international driver’s license is not evidence of establishing a domicile, having an actual driver’s license from the country could be used as proof. Furthermore, your visa should be “indefinite.” If it is only a one-year work visa or a shorter study abroad visa, you have not established a foreign domicile.
What is an “Abode” for Residency Tax Purposes?
An abode for tax purposes is a permanent structure where you could live all year. You do not have to live in an abode to maintain it. You do not have to own this property; a rental would qualify as an abode. For instance, you might keep an apartment that you sublet. If you have an abode in a state, you could owe state income tax even if you live abroad.
An essential part of an abode is the ability to reside in it throughout the full year. Therefore, if you own an unheated mountain cabin that you only vacation in during the summer months, it might not be considered an abode for tax purposes. However, a sublet apartment would be a residential abode.
State Income and Residency
Earned income is money paid for services performed, including wages or professional fees. The IRS defines earned income as being derived from salaries, commissions, tips, bonuses, and professional fees.
On the other hand, unearned income includes income from gambling, interest, capital gains, and other sources not related to personal services.
Some income is defined as variable by the IRS. For example, rental income, royalties, business profits, and other specified sources of income could be considered earned or unearned income depending on your circumstances. At US Tax Help, we will assist in defining your specific income streams.
If your income is sourced in the United States, you will be required to pay state income tax. In terms of earned income, the source is where you performed the service. If you worked for a New York company while abroad, your income would be sourced from the foreign location. Unearned income, for example, interest, will depend on where the financial account exists. Additionally, rental income will be considered sourced from where the property is located. Our office will categorize your income to determine how it affects your tax liability.
Other Residency Considerations for State Taxes for U.S. Expats
Many United States citizens working and living abroad will have a domicile in their home state. In addition to the residency requirement, whether you would have a state tax liability depends on the state’s tax code. Some states do not have a personal income tax. A good plan is to consider changing their domicile at home to avoid expensive state income taxes for U.S. expats. By establishing ties to another state before moving abroad, you could limit your tax liabilities.
States will look to see if you own, mortgage, or lease property in the state. Additionally, having a state driver’s license could be used to establish residency. Some other evidence of residing in a state includes maintaining bank or investment accounts, being registered to vote, or paying utility bills.
Contact Our Expatriate Tax Specialist to Discuss Your Residency and its Tax Consequences
If you are a U.S. expatriate, coupled with the excitement and challenges of working and living abroad, is the possible frustration of dealing with your federal and state income tax liabilities. As a United States citizen, you are required to file your federal income tax return. However, whether you are required to file a state return depends on your residency. To understand how your residence is defined by the IRS and how it will impact your tax obligations, contact the accountants for us expats at US Tax Help. Call our office at (541) 362-9127 to schedule your first appointment.