Towards the end of last year, in anticipation of my family’s move to Cape Town, I moved from Georgia to Florida.
Well, I didn’t really move to Florida. It wouldn’t have made much sense to up sticks and set up a new home in another U.S. state when I was planning to move abroad in a few months’ time.
Instead, I transferred my registered physical and postal addresses to that of a relative in the Sunshine State. I filed a change of address with the post office and had my mail forwarded. I logged on to my financial accounts, online shopping sites and other service providers and told them I was a Floridian now. I cancelled the registrations of our household vehicles, which we had sold anyway. I cancelled my voter registration in Georgia and registered in Florida. I would have cancelled my Georgia driver’s license, but the Peach State doesn't provide for that.
Why bother? Taxes.
Most Americans thinking about moving abroad know they will be liable for U.S. income taxes on U.S. source income like pensions, rental income, and interest. But many states will also expect you to pay taxes to them unless you do what I did.
When Americans move from one state to another, they make these adjustments as a matter of course. But it often doesn’t occur to them when they move overseas. The problem is that some U.S. states are quite insistent that you continue to pay taxes to them even if you live abroad. Some of the worst offenders include California, New Mexico, Virginia, South Carolina, New York, Mississippi, and Nebraska.
Those states have stringent “domicile” tests similar to those countries use to decide whether someone is a tax resident. If you keep “significant ties” to a state where you lived before moving abroad, they will judge that you remain a resident for tax purposes and want their cut of your income.
“Significant ties” include things like having a home in the state for your own use, keeping your voter registration and driver’s license there, and using it as your residential and postal address for business purposes.
To avoid this, you’ll want to do what I did:
Make sure you understand your state’s rules for tax residency, such as the number of days you spend within the state, and what they consider significant ties. Make plans to change all of that.
Change the registered address for all the institutions that pay you income—like a pension plan or brokerage—to a state that levies no taxes, or one that doesn’t enforce domicile rules very strictly. (No-tax states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.)
If you are going to keep your home in the state, rent it out, even if it's to a relative.
Try to organize your move to be near the end of the tax year so that you don’t trigger domiciled by spending too much time in the state in the following year.
If you own a rental property or a business in a state, make sure you understand the potential tax liabilities associated with that. This varies from state to state.
The trickiest part of this, of course, is establishing virtual residence in another state. I was able to do this because I have relatives in Florida who were happy to have me use home as both a physical and postal address.
Of course, not everyone has relatives in a no tax state. That’s why I’ll be covering the virtual residence issue next week!
Ted Baumann is International Living’s Chief Global Diversification Expert. He's traveled to nearly 90 countries and is a dual citizen of the United States and South Africa. Ted has been published in international research journals, as well as in media outlets such as Barrons, Forbes, and Cheddar. Learn more about Ted Baumann here.
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