Domicile (Residency) Determination for U.S. Citizens Moving Abroad

For people of every age and occupation, a move abroad can be an exciting development that leads to personal and professional growth, but it can also make things even more complicated come tax season. Even domestic Americans experience difficulties and complications arising from their taxes each year, both at the state and federal level, so it’s easy to see why those living in another country face significant stress when trying to pay the taxman. One of the issues at the heart of these difficulties is the concept of residency – where a person’s domicile, or permanent home, is located. Although it may seem like the residency of a U.S. citizen moving to another country should be clear, this issue can be as complicated as any other, which is why many expats seek out professional help with their taxes. If you recently relocated to a foreign country for any length of time, keep reading as the experienced accountant for us expats at US Tax Help clarify the matter of domicile and residency determinations for U.S. citizens moving abroad.

How American Citizens Moving Abroad Can Give Up U.S. Residency

When you move from one state to another in the U.S., the issue of residency is one that can impact many facets of life, from registering to vote to applying for a library card. Naturally, it also has an effect on a person’s tax liability, so it’s important for U.S. taxpayers living outside the United States to figure out where they stand, ideally before tax season begins.

Determining Your Domicile

The first idea to understand when it comes to residency is what qualifies as a domicile. In many states, a person’s domicile determines what taxes they are subject to, and simply moving away doesn’t erase this concern for U.S. citizens or residents. Generally speaking, your domicile is your permanent home, one to which you (seemingly) intend to return one day. Let’s say, for instance, that you are a resident of a certain state and own a home there where you and your family live, but your job takes you overseas for several months or years. Even if you bring your family with you, leaving the house empty, many states will still consider that house your domicile and tax you as though you were still living there, which can significantly increase your financial obligations when Tax Day rolls around.

Check State Laws

If you relocated to another country recently or are planning to do so, it’s important to look into the residency and domicile requirements of your specific state, as the laws governing this issue often vary from one place to the next. In some states, selling your home and buying another one in your new country of residence will be enough to eliminate the tax requirements that come with state residency, while others make it much more difficult. Virginia, for instance, will not allow anyone to give up tax residency unless they first establish residency in another U.S. state, while Maryland bars someone from changing their domicile if they move to a country that won’t allow permanent, indefinite residency for U.S. citizens.

Residency and Federal Taxes

The good (and bad) news is that residency doesn’t matter for federal tax purposes, because the American government will tax every U.S. citizen on their worldwide income, no matter where they live. Unless you renounce your U.S. citizenship as well as your domicile, you’ll still owe the IRS, though many expats can effectively eliminate their federal financial obligations through various deductions, credits, and exclusions; a qualified international tax specialist can tell you more.

Establishing Foreign Residency for U.S. Citizens Moving Abroad

Whether you’re a digital nomad living overseas or a corporate employee who relocated for work, there are plenty of tax benefits that come with foreign residency, especially at the federal level. Even filing delinquent U.S. expat taxes is made easier and (potentially) cheaper, regardless of the location of your domicile. However, many of these benefits require establishing another kind of residency – a process that’s simpler than it probably sounds.

To qualify for some of the most advantageous tax laws governing expats – namely the foreign earned income exclusion and foreign housing exclusion/deduction – you first must pass one of two tests: the physical presence test or bona fide residence test. These are the measures by which the IRS judges whether a person has been in another country long enough to qualify as a resident for tax purposes, and they require the following:

  • To pass the physical presence test, you simply need to be in one or more foreign countries for a total of 330 full days over the course of 12 consecutive months.
  • To pass the bona fide residence test, you must reside in another country for an entire tax year – January 1st through December 31st for calendar-year taxpayers. You may take trips back to the U.S. during this time, but only so long as you clearly intend to return to your home overseas.

Talk to an International Tax Specialist About Domicile and Residency Requirements for U.S. Citizens Moving Abroad

As you can see, establishing residency in another country – for U.S. tax purposes, at least – is not a complicated process, though each country has its own internal requirements for residency as well. The real trouble that U.S. citizens moving abroad tend to face is getting rid of their residency status in their home state, as failure to do so can result in significant financial losses through state income taxes. With the help of the experienced international accountants at US Tax Help, you can minimize your federal and state tax obligations after moving overseas and successfully navigate the intricacies of U.S. and foreign residency and domicile laws. Contact us online or call our offices today at (541) 362-9127 for help with taxes for US expats.