State Tax Returns

Tax Compliance

Some states also require expats to file a state return. State residency rules can be fairly broad—living overseas does not necessarily mean you are no longer considered a state resident for tax purposes. We help you determine your residency status and file your state income tax return, if necessary.

State Tax Return - General Concepts

When you move abroad, you may continue to have a state tax return filing obligation, depending on which state you lived in before your move and whether you are still considered a resident of the state for tax purposes. Most states will release you from a state tax return filing responsibility if you can demonstrate that you’ve made a permanent change in residency and have “broken” all ties with the state.

Each state has its own particular rules, so it is important to understand these rules and how they apply to your particular facts.

It should be noted that in general four states are known to be the most aggressive in trying to tax U.S. citizens moving abroad by making it very difficult to “break” ties with the state. These states are: California, New Mexico, South Carolina, and Virginia. On the other end of the spectrum, there are some states that do not impose an income tax on individuals.

One common situation that can trigger a state filing requirement is if an individual continues to own and rent out their house back in the U.S. The receipt of rental income from within a particular state can often trigger a filing requirement regardless of whether or not an individual has broken all ties with the state.

In addition, individuals may receive income from the sale of a company and such income may be paid out in installments. Meaning, a portion of their income may be placed in an escrow account and partially released each year. In these cases, issues arise when a transaction is consummated while the individual is a resident of the state and then receives future installment payments once they are no longer a resident. In this respect, it is important to note that the tax treatment of installment sales varies from state to state and is often very different from the federal income tax treatment.

Example - the case of Mr. Fuller

Mr. Fuller is a high-tech entrepreneur who was born and raised in California. He is married with children, owns a home in California, and he maintains a personal account at a local bank. In July of 2024, Mr. Fuller embarked on a 2-year relocation with his family to Australia to pursue new business opportunities abroad. He began renting an apartment there for this purpose. Mr. Fuller continues to own his home and maintain his bank account in California and plans to take several trips with his family to stay in their California home during each year of the relocation.

Under these facts, the California state tax authorities may argue that although Mr. Fuller physically moved from California as of July 2024, he should continue to be considered a resident of California because he has maintained sufficient ties with the state.

Filing State Tax Return for the First Year Abroad

Generally, states impose tax only on individuals who are residents of the state. If an individual is a resident of a particular state and then moves abroad, such individual will most likely be treated as a part-year resident for the year of the move and will most likely be required to file a state tax return and pay tax at least on the portion of income allocated to the period in which they were a resident.

However, with respect to the remainder of the year, the critical question is whether such individual is still considered “domiciled” in such state under the state’s tax rules. Many people often think that if they no longer live in the state, then they’re not considered residents of the state for purposes of filing a state income tax return. Although this conclusion may sound logical, it is not always correct. For example, in many states (such as California), the requirements for breaking residency are fairly strict and require not only that one move out of the state but also sever other ties they have with the state. Such ties include selling property owned in the state, closing bank accounts and even relinquishing a state issued driver’s licenses.

State Tax Return Filing Service

Because each U.S. state has its own tax rules and regulations, understanding your state tax return filing requirement requires expertise in your particular state's filing provisions.

Our in-house tax professionals are the core of our offer and of what makes us unique. We provide expert support from U.S. CPAs, EAs and tax attorneys at every step to tax compliance, providing the resources, knowledge and understanding of our clients’ needs to deliver the highest level of service and optimized outcomes.

Our experts can help you determine your residency status, and if needed, file your state income tax return accurately and on time.

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