State Taxes for Expatriates
Here are the important things to know about state taxes and working abroad. First, if you were a Massachusetts resident before you left for that overseas posting then you’ll still be a Massachusetts resident, even years later, even if you never come home again, unless you take affirmative steps to end your residency. This matters because, akin to the federal scheme, Massachusetts taxes its citizens on their worldwide income no matter where they live.
Second, Massachusetts won’t give you that sweet $97,600 income exclusion (the 2013 amount) that the feds do or the housing cost exclusion either (more about this here). It may be hard to imagine but even if you’ve spent the last decade living at the far ends of the earth the Commonwealth is going to take its piece from your entire year’s income.
And third, even if you’re not a Massachusetts resident, the Commonwealth could still tax you if your overseas income is in some way sufficiently connected to the state. This is referred to as Massachusetts “source income”.
Under the American federalist system, U.S. citizens are residents of two separate domains: The federal and the state. Each has its own government, its own courts and police, and its own independent power to impose and collect taxes.
We acquire our U.S. citizenship in well-defined ways: by naturalization, birth, or marriage. Giving up your U.S. citizenship is equally well-defined. There are specific forms to be filled in, sworn to, and delivered to appropriate government officials. There are special taxes to be paid and a passport to be returned. State residency is nothing like that.
State residency is an inner mindset. When the question arises, as it often does in tax law, whether you’re a resident of Massachusetts, the Department of Revenue is going to look at whatever facts it has to hand to peer into your soul. Whether you’re available to be taxed by the Commonwealth is mostly a question of fact and the burden of proof is on you.
For example, where are you registered to vote? In which state did you last file a tax return? Do you own property in Massachusetts, have a family here, own a house or rent an apartment here? Even if you’re living abroad does your paycheck come from a Massachusetts company? Is it deposited in a Massachusetts bank? And on and on. Not a single factor is dispositive. Construct a total set of facts, squint your eyes, and see if you can tell whether it looks like residency.
One more thing: Residence is sticky. That is, the last place you established residency remains your resident state until you affirmatively establish a new one. So if you were a Massachusetts resident and left it to wander the globe for thirty years, the Commonwealth can make you pay it taxes for every year, plus any applicable interest and penalties.
Whether a person can be a citizen of the United States and yet not be a citizen of any state is at present a very interesting but unresolved question. For now if you move abroad from Massachusetts, it’s doubtful the Department of Revenue would let you off the hook, no matter how long you had lived abroad.
One more thing to note: even if you are not deemed a Massachusetts citizen you still might have to pay taxes here on at least some of your income. The key question is usually whether the services you performed in exchange for wages were performed, i.e., “carried on”, in the Commonwealth. Generally, that’s easy to demonstrate one way or the other. You were living way across the big ocean, after all.
But the rule was written for another age, the one before the internet. So consider: if you are sitting in your Paris office Skyping with the Massachusetts home office, swapping documents, conducting video conferences, and so on, has your employment been “carried on” in Massachusetts? If yes then the Commonwealth will take 5.3% of your earnings, plus penalties and interest, for every year you’ve been away.
This article is for informational purposes only and does not constitute legal advice. You should consult a qualified attorney before taking any action.