How (and where) for an ex-pat to avoid paying state income tax?

[bribri]

First my deets:

46 yrs old, long term California resident RE'ing in less than a year. I plan on living outside of the US for 3-5 years (likely Southeast Asia). I will sell my California primary residence and all belongings before leaving. I do plan on coming back to California to live at the end of my travels.

During my 3-5 year US hiatus, my income will be:
* income from a rental unit (located in California)
* qualified dividends and LT gains from taxable accounts

Is it possible for my to avoid paying Cali's state income tax? Establish residency in another income-tax-free state w/o having to actually spend time in that state, or minimal time in that state?

 

[Ian S]

Unfortunately, you are in one of the worst states according to this article:Taxes for Expats - State Taxes and American Expats

it is recommended to first transfer your residency to a more amenable state (preferably the Favorable Nine) before moving overseas. This transfer of residency must be thorough, however. If, for example, you still own property in one of the stubborn states, the state government will assume you are planning to return.

 

[Onward]

Since your rental income has a CA source, you will owe CA income tax on it.

If you are not a CA resident, you will not owe CA income tax on your dividends and cap gains, but the CA Franchise Tax Board may try very aggressively to show that you are a CA resident and thus owe state tax. As evidence they will use anything they can dig up: your vehicle registrations, your voter registration, location of bank accounts, club memberships, etc. etc.

 

[haha]

Unfortunately, you are in one of the worst states according to this article:Taxes for Expats - State Taxes and American Expats

Excellent articles. Thank you.

Ha

 

[Ed_The_Gypsy]

Bribri, you might eyeball a recent thread here on moving to Puerto Rico, our own national tax haven. It comes with problems, but it may be good for you.

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[lawman3966]

I've investigated this several times over the years. You can decide to go with what seems ok, or what is most likely the safest way to avoid state taxation. I would not believe anyone who says, without documentation, that merely moving abroad relieves you of state tax liability.

Before going into the mechanics, I note that articles I've seen state that California and Virginia are the "stickest" with regard to state govts working to consider people to still be tax residents.

The following steps are what I've read create the greatest safety from state taxation. Whether they're absolutely necessary or not, I can't say. I assume that the person concerned is currently living in a state with an income tax.

(1) Before moving overseas, leave your state, and establish residency in a zero-income-tax state. This likely precludes staying in a hotel for a few weeks and changing driver's licenses.

(2) Change everything over to the new state: official address, driver's license, voter registration, the bank you use, even library membership.

(3) Sever ties to the taxing state: abandon driver's license, and voter registration (should be automatic with the steps in (2) above); terminate memberships in libraries, AAA in your old state; (3) close accounts registered at any local banks; end outstanding leases.
Ok, a tough call in your case: consider selling real estate.
This last one calls for some research, since you are receiving income from property in CA. However, you should assume that some CA govt official wants to make you a resident and will look for a basis to do so. I've read tales of people retiring to Indonesia, and eight years into retirement, getting a letter from the state of CA indicating that taxes are due, along with penalties and interest.

(4) The authorities seem to differ on whether you have to establish residency in a new state to stop being a resident of an old one. First, the rules may not be the same everywhere, and some say it's possible to be a resident of no state. Others insist that it's possible to be a tax resident of more than one state at a time (you could, in theory, satisfy one condition of tax residency in CA, and satisfy a different condition in Massachusetts for e.g.).

If state taxation would be a major imposition on you, I wouldn't leave this to chance. At a minimum, read up on the rules, and avoid leaving CA any basis for claiming you as a resident. If necessary, you could go a step further, and contact an attorney to ensure you've removed all links to the state that you don't want to be taxed by.

 

[kramer]

What shocked me about California tax provisions are claw back rules if you eventually move back to California, where they want to get your back taxes over the period of years you were abroad if they determine you intended to return all along.

Also, you may not be initially settled in any place abroad for awhile which could (technically) be a problem for residency purposes, especially if you don't pass the physical presence test. By settled abroad, I mean living in a particular country at a particular address with a long term visa and a driver's license, for instance. I didn't reach that stage until about 6 years after I retired and started traveling abroad full-time.

Anyway, after reading up on the details and after I had already left California, I got a driver's license in Texas. I only spent a few days there, registered to vote, joined a library, handed in my California driver's license to Texas, unregistered to vote in California, filed a Non-Resident California tax form at the end of the year. I had already been using my mailing address in Texas for some time for all my financial institutions.

For fairly small fry like us, the Non-Resident California tax form is your signal to them that you have left. So, after that, you don't want to appear on their radar again. I didn't even want a California-licensed vehicle and so I sold mine (was going to do that anyway).

Another thing to consider for residency purposes is your Health Insurance. If you are even a part-time USA resident, you are required to have USA-approved health insurance full-time, even when you are not there. Even the best policy from abroad (e.g., BUPA) will not qualify, even if it covers you in the USA. I no longer have to worry about this, even though I spend about 6 weeks in the USA per year (so I don't always pass the physical presence test), because I am a "bona-fide resident" of the Philippines according to IRS criteria (I have apartment, permanent resident visa, local driver's license, almost all my stuff is in the Philippines, I am truly only visiting the USA). I do buy a traveler's insurance policy for all visits to the USA (which is easier to get if you are a resident of somewhere besides the USA, not as easy for a perpetual traveler). As you can see, perpetual travelers without a home base abroad could run afoul of these rules.

By the way, I have happily never heard from California again, and I have not given them any reason to contact me, either ;-)

 

[Travelwanted]

Excellent thread. Thanks for this info. Very informative.