A lot of the conversation around expat taxes tends to discuss them at the federal level, but did you know that expat state taxes are important to plan for as well?
Similar to the Federal concept of taxation based on citizenship without regard to residence, many states have implemented rules that mirror this. Thus, the concept of state domicile was invented.
This is particularly important to plan for if you’re leaving a state that makes it difficult to break domicile, such as California, Washington, or New York.
Planning is especially true for American expats with a business registered in a US state (for reasons we’ll get into later). Failing to do so could leave you on the hook for filing and paying state taxes.
Read on to learn when states tax expats, what impacts your tax residence, how to sever tax ties with your former state, and more.
The Danger of US Expat State Taxes
Even if they’re not as high as federal US taxes, state taxes can take a significant bite out of your income. While several states levy no state income taxes, others impose high state tax rates:
- California: Up to 13.3%
- Hawaii: Up to 11%
- New York: Up to 10.9%
- New Jersey: Up to 10.75%
- Oregon: Up to 9.9%
And if you’re moving to a high-tax country, state taxes can be even more painful.
Example
Lee is a US business owner living in France. He owns a small winery in Northern California, making him a California tax resident. His total taxable income is $120,000 (~€102,376).
Assuming that:
a) no other tax breaks apply, and
b) all of his income is earned,
Lee would be subject to taxes at the following marginal rates:
- 9.3% in California state taxes
- 24% in federal US taxes
- 41% in French taxes
Even if Lee uses the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to eliminate his US federal income tax liability, many states — including California — don’t recognize these expat tax provisions.
As a result, he can’t use them to reduce his state income tax liability. Between France and California, Lee would face a top marginal tax rate of 50.3%.
Want to build a custom, tax-efficient exit plan before you move abroad? Check out our Moving Abroad Business Advisory Package.
Do Expats Pay State Taxes?
At this point, you might be wondering: “Are all US expats subject to state taxes?”
The (admittedly unsatisfying) answer is: it depends.
Depending on factors like where you maintain a home, spend most of the year, or most recently lived, you may need to file (and pay) in your state.
While each state defines tax filing requirements differently, most look at two main factors to determine whether or not you must file state taxes: domicile location and statutory residency.
Related reading: How to File Expat Taxes from Abroad
The Main Tax Residency Test Criteria
Domicile location
Domicile location refers to the place where you maintain a true, permanent home. (1)
Owning a home in one state doesn’t necessarily mean you’re domiciled there, however. A vacation home or rental home, for example, typically doesn’t place you under the domicile category. To qualify as your domicile, your home must be one that you plan on living in for the long haul, meaning you will eventually return there even if you are temporarily absent (abroad, perhaps!).
Let’s say that you own a home in St. Paul, Minnesota, but decide to rent it out while you live in Italy for a two-year work contract. If you plan on moving back to that home at the end of your contract, it would likely count as a domicile.
On the other hand, if you plan to stay in Italy permanently — or move to another home upon returning to the US — your Minnesota home would not be a domicile.
How would Minnesota know the difference? The burden of proof is on you, the taxpayer, to support your own claims. (See Ingle v. Tax Appeals Tribunal, 110 A.D.3d 1392 (N.Y. App. Div. 2013). Linked in references at the end of the article.)
Statutory residency
While domicile location is about where you maintain your permanent home, statutory residency is about where you spend your time. In many states, spending over half of the year (i.e., 183 days) there will trigger statutory residency, making you a tax resident of that state.
That said, some states have different statutory residence thresholds, such as North Dakota, which has a significantly more lenient threshold of 210 days. (2)
Keep in mind that to qualify as a state tax resident under statutory residency, you must often have an abode there as well. Unlike a domicile, an abode isn’t necessarily your true, permanent home — it’s simply a place where you currently reside or could potentially reside.
For example, if you have your own room at your parents’ home and stay there regularly when you return to the US, that house may qualify as an abode for tax purposes.
Why Business Owners Are Particularly Vulnerable to Expat State Taxes
Even if you don’t meet a state’s traditional tax residence test criteria, you may still be subject to state income taxes if you own a business registered there. Why? A concept called “economic nexus” allows states to impose taxes on businesses with substantial economic activity in that state, even if they don’t maintain a physical presence. (3)
Although the term “economic nexus” typically refers to sales taxes, states may apply similar standards to state income tax, particularly for businesses that provide services or earn income from non-physical assets (e.g., investments, copyrights, licenses).
Registering your LLC in a given state typically triggers an automatic state income tax filing requirement and an incorporation fee, often followed by annual fees thereafter. Whether you owe state income taxes, however, depends on factors like whether you performed services in that state or earned a substantial amount of income from in-state customers, clients, or assets.
Example
Sonia is a US expat who works as a freelance marketing consultant. Born and raised on Long Island, she lived in New York her entire life until she moved to Portugal in 2024, and her LLC is still registered there. Even though she works from Portugal, all three of her clients are New York-based small businesses.
Because her business is registered in New York, she has to file New York state income taxes each year and pay a bi-annual fee of $9. (4) And since all of her income comes from New York-based clients, she must pay New York state income taxes as well.
Sticky States: An Additional US Expat State Tax Trap
So far, we’ve covered three reasons someone might meet a “resident for tax purposes” test:
- They maintain a domicile in a given state
- They exceed a state’s statutory residence threshold
- Their business has sufficient economic ties to a certain state to trigger economic nexus
But there’s one more factor that could cause you to meet a tax residency test: having previously lived in California, New Mexico, New York, South Carolina, or Virginia. These states are sometimes called “sticky states” because tax residency tends to “stick” to you even after you leave.
While most states won’t consider you to be a tax resident after you move abroad — assuming you don’t meet the aforementioned criteria or earn income sourced from that state — sticky states typically consider you a tax resident unless you prove otherwise beyond a shadow of a doubt.
Fortunately, there are steps you can take that may help you break state tax residency.
How Changing State Tax Residency Can Help
As we hinted at earlier, there are eight states that don’t impose any state income taxes: (5)
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Wyoming
When living within the US, it’s usually not worth registering your business in any other state than the one you live in. That’s because regardless of where your business is based, you’ll still need to report — and potentially pay taxes on — that income in your state of residence.
As an expat, however, you may be able to greatly benefit from registering your business in one of these tax-friendly states.
An Important Caveat
If you maintain significant ties to your former state (e.g., storing your belongings there, regularly visiting, owning property there), that state may consider you to be a tax resident even if you don’t meet the official tax residency test criteria.
Similarly, if you move abroad but eventually return to your former state of residence — even if you do so years after your initial overseas move — the state may argue that you were a tax resident the whole time. They may even attempt to recoup back taxes, often with a hefty late penalty attached.
In situations like this, establishing tax residence in another state may not be worth the hassle. After all, you’d still need to file taxes for the state you already have residence in. Of course, the only way to know for sure is by consulting an expat tax advisor.
Severing Ties With Your Existing State of Residence
Most states make it relatively straightforward for expats to end their state tax residency. In these states, you’ll generally just need to clearly establish that you no longer live there and don’t maintain significant connections. A few ways you might do this include:
- Selling or renting out your previous home
- Ensuring that neither you nor your immediate family lives or works there
- Relocating your personal belongings
Then, you’ll need to file paperwork with the state to terminate the business’s registration. (6) Finally, file a part-year tax return during the year you moved that clearly indicates the day you stopped being a state tax resident.
If you most recently lived in a sticky state, however, you often need to go further to prove you’ve abandoned your domicile. This could involve:
- Updating your mailing address on all official records (e.g., bank accounts, passport)
- Ending memberships in local clubs, gyms, or other social organizations
While some forums recommend closing local bank accounts or ending relationships with location-based financial advisors, we consider this a step that causes more inconveniences than it eases.
Nicolás Castillo, cpa
The rules can vary fairly significantly by state, so make sure to read up on that individual state’s tax laws or work with a tax professional who knows them well.
Note: Even if you are no longer a tax resident of a given state, you may need to file a state tax return if you earn income sourced from there (e.g., rental income from a property located there). In that case, you typically must file a non-resident tax return each year.
Establishing Residence in a New State
Once you’ve severed ties with your old state, you’ll need to establish residence in your target state. The first step for business owners is usually registering your business there. (7) Other ways to prove your residence in your target state include:
- Signing a lease or buying a home there
- Updating your address with the USPS and IRS
- Opening up a bank account there
Overall, it’s important that your tax situation reflects that you are more closely associated with the new location than the previous one. This is based on multiple factors, from where you spend your time, where your kids go to school, where your dog goes to the vet, etc. Do not worry if you were unable to change your driver’s license before moving or if you held onto your in-state voter’s registration because that is important to you. The state tax authorities will need to consider the full picture, so do not fret the trees when you should consider the forest.
Nicolás Castillo, cpa
Minimize Your Taxes With the Right Strategy
Understanding your state tax and reporting obligations is the first step toward reducing or even eliminating them.
Even if it doesn’t make sense for you to register your business in a tax-friendly state, becoming familiar with tax residency rules may at least help you avoid late penalties, audits, and other unpleasant consequences.
Of course, the only way to be certain about the right path forward is with the help of an expat state tax accountant.
Schedule a consultation today to learn how you can sidestep some or all state taxes and plan a tax-efficient future.
Resources
- State of Residence for Tax Purposes: How To Avoid Double Taxation
- Resident – North Dakota Office of State Tax Commissioner
- A practical guide to economic nexus
- Biennial Statements for Business Corporations and Limited Liability Companies
- State Individual Income Tax Rates and Brackets, 2025
