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Do U.S. Citizens Living Abroad Need to File State Taxes?

They say there are two things certain in life: death and taxes. But what if you’re living overseas? Do U.S. citizens living abroad need to file state taxes? Well, it depends. The answer to this question can be a little complicated and can vary from state to state. Do U.S. citizens living abroad need to […]

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Joseph Anthony
September 8, 2020
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They say there are two things certain in life: death and taxes. But what if you’re living overseas? Do U.S. citizens living abroad need to file state taxes? Well, it depends. The answer to this question can be a little complicated and can vary from state to state.

Do U.S. citizens living abroad need to file state taxes? Though the answer can vary, you’ll likely find that in most cases, you’re on the hook for state taxes where you’re domiciled even if you’re working or living in another country. 

How can you avoid paying state taxes when you’re a U.S. citizen living abroad? You might consider changing your official U.S. address to South Dakota. Residents and those domiciled in The Mount Rushmore state pay no state income taxes and enjoy other benefits. Keep reading and get information to make sense of tax requirements.

Do Expats File Taxes?

As long as you are a U.S. Citizen or a Green Card holder, you’ll need to file taxes each year. Thankfully, there are rules that might keep those living and working abroad from paying too much. In fact, you might find that expats pay zero in taxes to the U.S. government.

State taxes are another story. Some states still want your tax dollar no matter where you’re living. Some states, like California for example, don’t follow the same rules as the federal government. This might mean you’ll need to pay money when filing a state income tax return in the state where you’re officially domiciled. 

Taxes for expats can be tricky. With a little know-how, you can make sense of all of the rules and regulations. You might even be able to keep a little money in your pocket by choosing the right state for domicile when you’re working abroad.

Do U.S. Citizens Living Abroad Need to File Federal Taxes?

Want to know if U.S. citizens living abroad need to file federal taxes with the IRS? The answer is yes. Information from the Internal Revenue Service, indicates that U.S. citizens and resident aliens need to file taxes every year on their world-wide income. This means you’re likely responsible for paying the U.S. taxman no matter where you made your money if you’re a citizen or you have a Green Card. 

What counts as income? Basically most any money that you earn, no matter whether it comes from a foreign country or the U.S., counts as income for tax purposes. This means your income might include:

  • Wages from the job you’re working abroad
  • Any interest earned no matter where the account is based
  • Dividends paid on stocks or investments
  • Rental income earned 

Does This Mean I Have to Pay Taxes Twice?

Does the U.S. tax burden mean you’ll be subject to double taxation and have to pay taxes on your income twice? Not necessarily. There are a few rules that can benefit you when paying taxes as an expat. Rules like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit can come in handy when you’re an expat filing a federal income tax return in the U.S. 

Taking advantage of the FEIE and Foreign Tax Credit might mean you owe zero taxes to the IRS. In fact, most American expats pay nothing in federal taxes. You’ll still need to file each tax year, though. Choosing the right filing forms to take advantage of these credits proves you are eligible for benefits.

Also of note: The filing requirements are a little different for U.S. citizens living abroad. In fact, you’ll find that expats have an extended tax deadline. If you’re a citizen or Green Card holder in another country, your tax deadline is June 15 as opposed to April 15 for those based in the U.S. However if you choose to take advantage of the extended deadline, you’ll likely want to pay any owned money to the IRS by April 17 to avoid interest and potential penalties. 

What Form Do U.S. Citizens Living Abroad File?

Just like when you lived and worked stateside, U.S. citizens living abroad most likely need to file federal taxes with IRS Form 1040. There are a few other forms that will need to accompany your 1040 if you want to take advantage of the tax credits for expats. 

The additional forms might include:

  • IRS Form 2555 – Foreign Earned Income Exclusion (FEIE)
  • IRS Form 1116 – Foreign Tax Credit (FTC)
  • IRS Form 8938 – Statement of Specified Foreign Assets

Filing Form 8938 might get complicated depending on your assets and filing status. This form is required if you have a certain amount of assets in foreign bank accounts. As of 2020, if you are filing joint taxes with a spouse, the threshold is $400,000 if you’re living outside of the U.S. The threshold for this form is $200,000 if you’re filing status is single. 

It might be wise to consult with a tax preparation expert to confirm which forms are required when filing as an expat.

Do U.S. Citizens Living Abroad Need to File State Taxes?

While filing federal taxes is a sure thing for expats, U.S. citizens living abroad might get off scot free when it comes to state taxes. You can avoid paying state taxes by choosing to maintain an official U.S. domicile in a state where residents aren’t required to pay state taxes.

There are 7 U.S. states that don’t require those domiciled there to pay state income taxes. You might consider these “easy” states when it comes to state taxes for expats. These states are:

  1. South Dakota
  2. Nevada
  3. Alaska
  4. Florida
  5. Texas
  6. Washington
  7. Wyoming

Bonus: New Hampshire and Tennessee are also fairly easy states for expats. These two states don’t tax wages, but might tax dividends and interest.

There are other states that make taxes for expats a little more complicated. These states are considered “sticky” states. California, South Carolina, Virginia and New Mexico have stricter rules for expats filing state taxes. For example, California doesn’t go by federal rules regarding FEIE and Foreign Tax Credits. This means you might pay twice on your income earned abroad.

If you choose to maintain your official U.S. address in a state that doesn’t require you to file state tax returns, you won’t have to file or pay as an expat. If you maintain residency in one of the 37 other states, you’ll likely have to file and pay.

What Happens If You Don’t File Taxes While Living Abroad?

If you fail to file federal or, if required, state taxes while living abroad, you’ll face the same repercussions that you would if you still lived or worked on U.S. soil.

This means you might have to pay a pricey penalty fee, pay interest on any amount owed or even be disqualified from benefits that might reduce your tax burden. The IRS can put a lien on your U.S. assets, garnish your wages or in extreme cases, even send you to jail for tax evasion.

It is important to file taxes each year even if you don’t owe any money to the government. 

Can Expats Avoid Paying State Income Tax?

Now that you know the fallout that can come with not filing your taxes, it’s time to think about how you might legally avoid filing state income tax. While federal taxes are a must for U.S. citizens and residents, you can skip out on state income taxes by being savvy before you head overseas.

If you want to save on taxes, consider establishing residency in one of the 7 states that don’t require income tax before leaving the country. Keep in mind that establishing residency in a state requires a little more than just changing your address. 

To become a resident of another state, you’ll need to establish a home base in that state. You need to make it look like that state is your permanent home, even while you’re living or working abroad. You can do a few things to show your new state of residency is your permanent home. You might consider doing the following in your new state to establish residency:

  • Obtaining a permanent address 
  • Obtaining a driver’s license 
  • Registering your cars 
  • Insuring your vehicles 
  • Switching your bank accounts 
  • Choosing health care providers 
  • Registering to vote 

If you’re wondering which of the 7 states that don’t require income taxes to choose as your home base as an expat, consider South Dakota. In addition to not requiring residents to file a state income tax return, you’ll find many other benefits of South Dakota domicile.

Benefits of South Dakota Domicile for Expats

If you’re living or working abroad and intend to return to the U.S., you’ll likely find there are many benefits to establishing domicile in South Dakota before you even cross the border. 

Some of the perks of maintaining a permanent address in South Dakota include:

  • Lax residency requirements
  • No state income tax
  • No pension tax
  • No social security tax
  • No intangible tax
  • No personal property tax
  • Only 4% excise tax on vehicles (one-time)
  • Low vehicle registration fees
  • Affordable vehicle insurance rates
  • No annual vehicle inspections

Living and working overseas or abroad can be expensive, so it might make sense to establish residency in a place where you can save money.

How to Become a Resident of South Dakota

Before you head overseas or abroad as an expat, consider becoming a resident of South Dakota. You’ll save on taxes and more. In fact, you’ll only have to deal with federal taxes if you keep your U.S. address in South Dakota. A South Dakota address and domicile will simplify tax time and help you keep more of your hard-earned money.

You can become a resident of South Dakota in 3 simple steps. Consider making the following moves to establish an official domicile in The Mount Rushmore State.

Make South Dakota Home with a Permanent Mailing Address

The first step in becoming a South Dakota resident is to obtain a permanent mailing address. You can do this by taking advantage of a mail forwarding service like Americas Mailbox. A mail forwarding service is a great option when you need a permanent mailing address and homebase in the U.S. for life abroad.

When you opt to get a permanent South Dakota mailing address, you’ll find you get quite a few perks. As an expat, you’ll get all the benefits -- including tax savings -- of living or working in South Dakota while you’re abroad. If you choose to establish a permanent address with Americas Mailbox, you can even get mail and packages at your U.S. address. The friendly agents with America’s Mailbox will forward your mail and parcels to you no matter where you are in the world.

It is easy to establish a South Dakota address with the 5 tiers of service offered by Americas Mailbox. A basic bronze plan might work if all you need is an address. If you’re running a U.S.-based business from overseas, you might choose for a Titanium Scanning plan. No matter what you need, Americas Mailbox has the service.

When you select a plan, you’ll need to fill out a few forms to get started. One of these forms is the  USPS Form 1583. The UPS form will grant permission for an agent to handle your mail. 

If you’re establishing South Dakota residency for tax purposes, which is likely if you’re an expat, you’ll also want to complete IRS Form 8822. This form tells the IRS about your new permanent address and will let you use the new address for tax purposes.

When you have your brand new South Dakota address, consider taking other steps to establish residency right away. You might want to change your address with your bank and credit cards, register to vote in South Dakota, register and insure your vehicles in South Dakota and more. Taking these steps will help you establish and prove residency in the eyes of the IRS.

When you have your South Dakota mailing address set up with Americas Mailbox, you can move on to the next step to establish residency in The Mount Rushmore State.

Spend Just One Night in South Dakota

If you’re going to have a permanent address in and be a resident of South Dakota, you’ll need to spend a minimum of 1 night in the state. No matter whether you stay in a campground or in a hotel, you’ll need to document your stay with an official receipt. The receipt is necessary for the next step in the residency process.

Spending the night in South Dakota might be your favorite part of establishing residency. Why? Simply put, The Mount Rushmore State is beautiful. From the Black Hills to the Badlands and beyond, there is so much to see and enjoy in South Dakota. 

Obtain a South Dakota Driver’s License

The final step an expat should take to establish South Dakota residency before heading abroad is obtaining an SD driver’s license. A South Dakota driver’s license or State ID Card will prove your residency. When you have this official identification, you can register your vehicles, register to vote and take other steps needed to demonstrate your residency.

To get a driver’s license or ID in South Dakota,  you’ll need to visit a driver exam station. You’ll need to come prepared with some essential documents to prove your identity and overnight stay. This means you’ll be required to have the receipt from the campground or hotel where you spend the night; documents proving your identity and citizenship, like a birth certificate or passport; and additional proof of your permanent South Dakota address like a piece of mail or fail forwarding contract. Additional paperwork might be required. The friendly agents at Americas Mailbox can help you confirm what documents and paperwork are needed. 

After you have completed the above steps, you should be ready to head abroad as a resident of South Dakota. Expats who choose residency in The Mount Rushmore state enjoy tax savings and much more.

Save on State Taxes as an Expat with Americas Mailbox

There are many reasons you might choose to lead life abroad as an expat. Working and living in a different country is an adventure. You might be immersed in a new language. You might enjoy unique career opportunities you can’t find in the U.S. You might see new sites and enjoy exploring a whole other country.

But do U.S. citizens living abroad need to file state taxes? As you likely learned above, you can avoid filing state taxes while living or earning money abroad by keeping an official U.S. address in South Dakota. Make the most of your paycheck and keep more money in your pocket at tax time by establishing a mail forwarding service in The Mount Rushmore State with Americas Mailbox on your side.

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