When American citizens move abroad, choosing the right state to keep as their home base, or “domicile,” is important.
This choice can significantly impact their tax situation, affecting how much they pay and to whom.
Key factors impacting expat taxes:
- State Income Tax: While some states have no income tax, others do, offering potential savings.
- Residency Rules: States vary in their residency requirements—some are easier to maintain while others have stringent guidelines.
- Tax on Global Income: Depending on the state, expats might be taxed on their worldwide income, not just earnings within the U.S.
- Foreign Earned Income Exclusion & Tax Credits: Some states allow expats to exclude foreign income or claim tax credits on taxes paid to foreign countries, though most do not offer these benefits.
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Group 1: Simple residency, zero-state income tax
From our research, Florida and South Dakota stand out as the top states for expats due to their easy residency requirements and no state income tax.
#1 Florida:
Pros:
- Vehicle Registration: You can register a car remotely without being physically present.
- Lifestyle Friendly: Great for retirees, expats, digital nomads, sailors, and military members.
- Domicile Support: Companies like SavvyNomad assist with residency setups.
- Asset Protection: Laws that safeguard personal assets.
- Location Perks: Close to cities and airports, perfect for frequent travelers.
Cons:
- Address Requirement: A street address or personal mailbox is necessary but manageable with domicile services.
- Vehicle Inspection: A one-time VIN inspection is required, but it can be done outside the state.
Florida Residency: Guide for Digital Nomads
#2 South Dakota:
Pros:
- No Income Tax: You save on all income.
- Simple Vehicle Registration: Entirely online, no need to visit the state.
- Minimal Bureaucracy: Straightforward with little red tape.
- Mail Forwarding: Helpful for maintaining residency with limited presence.
Cons:
- Recent legislative changes: In 2023, South Dakota increased the physical presence requirement and restricted the use of PMB addresses for voting and payroll purposes.
- Voting restrictions: You need a residential address to vote.
- Payroll tax complications: Personal mailbox addresses cannot be used for payroll taxes, affecting W-2 employees.
- Less RV-friendly: Recent policy changes have made the state less accommodating for RVers.
- Physical presence requirement: Requires at least one overnight stay in the state.
Both states provide substantial advantages, making them attractive for American expats looking to reduce their tax liabilities while maintaining a flexible, nomadic lifestyle.
Domicile in South Dakota: Guide for digital nomads
Group 2: Moderate residency rules, zero-state income tax
This section explores states with no state income tax but stricter residency rules, which may not be as convenient for nomads due to physical presence requirements and vehicle inspections.
Key characteristics:
- No state income tax.
- Minimum stay requirements.
- Less ideal for nomadic lifestyles.
States:
- Alaska
- Nevada
- New Hampshire
- Texas
- Tennessee
- Washington
- Wyoming
Texas
Pros:
- No Income Tax: Saves on all income.
- Travel Access: International airports are plentiful, aiding frequent flyers.
- Health Insurance: Broad range of ACA-compliant plans.
- Car Registration: Vehicle needs to be present for a safety inspection.
- Driver’s License: Renew every 8 years.
Cons:
- 30-Day Requirement: You must reside in Texas for 30 days to obtain ID or driver’s license.
- Annual Vehicle Inspection: Required for all registered vehicles.
- Residential Address: You must have a physical address, which is restrictive for nomads.
Nevada:
Pros:
- No Income Tax: Offers substantial financial savings.
- International Airports: Ample options for global travelers.
- Health Insurance: Variety of ACA-compliant plans.
- Car Registration: Vehicle smog checks are needed in some counties.
- Driver’s License: Renew every 7 years.
Cons:
- 30-Day Stay Requirement: A 30-day consecutive stay is mandatory for residency.
- Annual Smog Checks: Required for vehicle registration in major counties.
- Residential Address: A physical address is required for residency.
Washington:
Pros:
- No Income Tax: Significant savings on all income.
- International Airports: Good for frequent travelers.
- Health Insurance: Broad ACA-compliant coverage.
- Car Registration: Requires in-state smog checks.
- Driver’s License: Renew every 7 years.
Cons:
- Residency establishment: Requires substantial physical presence to prove residency.
- Vehicle inspections: Periodic emissions testing required in some areas.
- Residential address required: Must have a livable address for residency.
Wyoming:
Pros:
- No Income Tax: Financial savings on all income levels.
- Air Travel: Limited but sufficient access to airports.
- Health Insurance: Wide ACA-compliant options.
- Car Registration: VIN inspections, can be done by local authorities.
- Driver’s License: Renew every 10 years.
Cons:
- Residency Challenges: Obtaining a physical address can be difficult.
- Residential Address: Physical address is mandatory for residency.
Challenges for expats:
- Detailed residency criteria: More stringent requirements for establishing and maintaining residency compared to states with easier processes.
- Annual vehicle inspections: Ongoing requirements for vehicle registration can be inconvenient, especially for those who travel frequently.
- Maintaining residency: Physical presence and paperwork can be burdensome for nomads and expats.
Benefits for expats:
- No tax on income: All these states provide significant tax savings by not taxing any income.
- Financial advantages: Potential savings on income tax, estate tax, and business expenses.
Group 3: No tax on worldwide income for non-residents
This section highlights states that don’t tax worldwide income for non-residents, offering substantial savings for expats who maintain non-residency. If you’re originally from one of these states, you may not need extra steps to keep your domicile. However, these may not be ideal for establishing a new domicile. In that case, consider Group 1 or 2 states.
States:
- Colorado
- Connecticut
- Delaware
- Massachusetts
- Minnesota
- Missouri
- North Dakota
- Oregon
- Pennsylvania
- Virginia
- West Virginia
Key characteristics:
- No tax on global income for non-residents: Significant savings for expats.
- Easy non-residency requirements: Simplifies maintaining non-residency.
- Tax Savings: Not taxing global income helps expats retain more earnings.
Pros:
- Financial Benefits: Significant savings by avoiding taxes on worldwide income.
- Residency Maintenance: Non-residency is easier to keep, reducing the paperwork burden.
- Health Coverage: Access to ACA-compliant health insurance plans.
Cons:
- Address Requirements: A residential address is still needed, which may restrict nomads.
- Vehicle Registration: Inspections and local addresses are required, posing challenges for frequent travelers.
Group 4: Worldwide income tax for domiciles with FEIE
This section covers states that tax worldwide income for residents but allow a foreign earned income exclusion (FEIE), which helps reduce the state tax burden on global earnings. In 2024, expats can exclude up to $126,500 of their foreign income.
Key characteristics:
- Worldwide income tax: These states tax residents’ global earnings.
- FEIE: Expats can exclude up to $126,500 of foreign-earned income.
- Potential Savings: Reduces taxable income through the FEIE.
States:
- Alabama
- Arizona
- Georgia
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Maine
- Michigan
- Ohio
- Oklahoma
- Rhode Island
- South Carolina
- Utah
- Vermont
Pros:
- Foreign Earned Income Exclusion: Reduces state tax liability by excluding significant foreign-earned income.
- Tax Clarity: Detailed provisions for expats simplify compliance and planning.
Cons:
- Worldwide income taxation: Residents are taxed on their global income, which can result in higher tax liabilities compared to states with no income tax.
- Complex tax filing requirements: Navigating state tax laws can be complex and may require professional assistance.
- Exclusion Limit: The foreign earned income exclusion is limited to $126,500 for the 2024 tax year, and only applies to earned income. Other types of income, such as capital gains, are still subject to state taxes .
Group 5: Worldwide income tax for domiciles without FEIE
This section examines states that tax residents’ worldwide income without offering the Foreign Earned Income Exclusion (FEIE). Expats in these states face heavier tax burdens on global earnings, as there are no mechanisms to reduce the tax liability.
Key characteristics:
- Worldwide income tax: These states tax residents on all global income.
- No FEIE: No options to exclude foreign income from state taxes.
- Higher Tax Liabilities: Expats will have to pay more taxes on their global earnings.
States:
- Arkansas
- Indiana
- Kentucky
- Louisiana
- Maine
- Maryland
- Mississippi
- Montana
- Nebraska
- New Mexico
- North Carolina
- Wisconsin
Cons:
- Global Taxation: These states impose taxes on worldwide income, leading to higher liabilities.
- No Income Exclusion: Without FEIE, expats face heavier taxation on foreign income.
- Complex Tax Filings: Managing taxes in these states can be complicated, often requiring professional assistance.
Impact on Expats:
- High tax burden: Expats domiciled in these states will face higher tax liabilities on their worldwide income.
- Need for professional assistance: Due to the complexity and potential high cost of compliance, expats may need to seek professional tax help to manage their obligations effectively.
Group 6: Worst possible states for expats
If you’re domiciled in one of these states, consider relocating to a state in Group 1 or 2. High-tax states like these often result in expats paying for services they don’t use, leading to unnecessary tax burdens. Moving to a no-tax state could bring significant savings and ease your tax compliance.
States:
- California
- Hawaii
- New Jersey
- New York
Key characteristics:
- High Income Tax Rates: These states have some of the highest tax rates in the country.
- Global Income Tax: All worldwide income is taxed without exclusions.
- Complex Tax Laws: These states have intricate filing requirements that are hard to navigate.
California:
- High State Income Tax: California has one of the highest state income tax rates, reaching up to 13.3% .
- Worldwide Income Taxation: All income earned globally is taxed without any exclusions.
- Complex Compliance: Detailed tax laws and regulations require extensive documentation and may necessitate professional tax assistance.
Hawaii:
- High State Income Tax: Hawaii’s state income tax rates can go up to 11%.
- Worldwide Income Taxation: Residents are taxed on their global income without any exclusions.
- Complex Compliance: Hawaii’s tax laws and regulations are intricate, requiring careful planning and often professional assistance to navigate.
New Jersey:
- High State Income Tax: New Jersey’s state income tax rates can go up to 10.75% .
- Worldwide Income Taxation: All income earned globally is taxed without any exclusions.
- Challenging Compliance: Tax filing in New Jersey is known for its complexity, often requiring professional help to navigate the regulations.
New York:
- High State Income Tax: New York’s state income tax rates can reach up to 10.9%, and when combined with New York City taxes, the total rate can go as high as 14.776%
- Worldwide Income Taxation: All income earned globally is taxed without any exclusions.
- Complex Filing Requirements: New York’s tax laws are intricate, and compliance can be difficult without professional assistance.
Cons:
- High Tax Burden: Expats domiciled in these states face significantly higher tax liabilities on their worldwide income.
- No FEIE: These states do not provide a foreign earned income exclusion, resulting in no relief for expats from high tax burdens on foreign-earned income.
- Complicated Tax Filing: The tax filing process in these states is complex and can be challenging to manage, often requiring professional tax assistance.