State Taxes After Moving Abroad: What You Still Owe
Everyone talks about federal taxes when you move abroad. Nobody warns you about state taxes.
When we started the Dutch-American Friendship Treaty (DAFT) process, we assumed that leaving the US meant we were done with state taxes. We were wrong. Depending on which state you lived in, you might owe state income tax for years after moving to the Netherlands.
Why State Taxes Follow You
The IRS taxes you based on citizenship. States tax you based on residency. The problem is that each state defines "residency" differently, and some make it very hard to stop being a resident.
There's no federal standard. Each state has its own rules for when you become a non-resident. Some states let go easily. Others hold on tight.
If you don't properly terminate your state residency before or when you move, you could be filing and paying state taxes on top of your US federal tax obligations and your Dutch taxes.
The "Sticky" States
These states are known for aggressively maintaining tax residency claims on former residents:
California: The most aggressive. California considers you a resident until you establish permanent residence elsewhere. Having a California driver's license, bank account, or voter registration can be used as evidence of continued residency. They may tax you for the entire year you leave, regardless of when you actually moved. The Franchise Tax Board actively audits people who claim to have left.
New York: Similar to California. New York uses a "domicile" test and a "statutory resident" test. If you maintain a permanent place of abode in New York and spend more than 183 days there in a tax year, you're a statutory resident. Even after you leave, New York may argue your domicile is still there if you haven't clearly established one elsewhere.
Virginia: Requires you to file a return for the entire year you leave. Virginia also has broad residency definitions that can catch people who think they've moved.
New Mexico: Considers you a resident until you establish domicile in another state -- not another country. This is a real problem for people moving abroad because the Netherlands isn't a US state.
South Carolina: Has a 183-day rule and broad definitions of what counts as maintaining residency ties.
States With No Income Tax
If you were living in one of these states before moving, you're in luck:
- Alaska
- Florida
- Nevada
- New Hampshire (dividends and interest only, phased out)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Many DAFT entrepreneurs we know specifically established residency in a no-income-tax state before moving. Florida and Texas are the most popular choices. It takes planning, but it can save you thousands per year.
How to Break State Residency
To cleanly sever ties with your state, take these steps before you leave:
- Surrender your state driver's license. Get a license from a no-tax state if possible, or plan to get your Dutch driving license after arrival.
- Update your voter registration. Unregister from your current state or register in a no-tax state.
- Close state bank accounts or move them to a national bank in a no-tax state.
- File a final state tax return as a part-year resident for the year you leave.
- Update your address everywhere. IRS, banks, investment accounts, insurance.
- Document everything. Keep records of when you left, what you changed, and why.
The goal is to leave no evidence that you intended to return. If the state can argue you maintained connections, they can argue you're still a resident.
The Part-Year Return
In the year you move, most states require you to file a part-year resident return. You'll report income earned while you were a resident of that state, and potentially apportion income based on the days you lived there.
This is where it gets tricky for self-employed DAFT entrepreneurs. If your business income isn't tied to a specific location, the state may try to claim a portion of it.
Keep detailed records of when you stopped working from the state and started working from the Netherlands. Flight records, lease agreements, and KVK registration dates all help establish your timeline.
What About State Taxes on Investments?
If you maintain US investment accounts, some states will try to tax investment income based on your last state of residency. This is another reason to establish residency in a no-income-tax state before leaving.
For retirement accounts like 401(k)s and IRAs, distributions may be taxable by your last state of residency unless you've properly severed ties.
FAQ
Q: Can I just change my address to a family member's house in a no-tax state?
A: Simply using a family member's address isn't enough. States look at where you actually lived, where you voted, where your car was registered, and where you had financial ties. You need genuine connections to the new state. Some people rent a small apartment or use a registered agent, but you should also update all your documents to match.
Q: What if my state sends me a tax bill after I've moved to the Netherlands?
A: Don't ignore it. States can assess penalties, interest, and even issue liens against you. Respond promptly, provide documentation of your move, and consider hiring a tax professional who handles state residency disputes. The cost of fighting it is usually less than paying years of state taxes you don't owe.
Q: Does the US-Netherlands tax treaty help with state taxes?
A: No. Tax treaties are between countries, not states. Your state doesn't care about the US-Netherlands tax treaty. State tax rules are entirely separate, which is why you need a state-specific strategy.
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We're not immigration lawyers -- just Americans who did this. Requirements change, so verify with official sources.