Is it possible to pay US Income tax, without paying state income tax?

Question

This is a bit of a followup to my earlier question...

I'm a US citizen, working for a US company, and paying US income taxes. I've switched my banking records and all to use my sister's address in Kansas. As such, I continue to "pretend" to live in Kansas, for the purpose of voting, paying taxes, etc.

But I'm really living in Mexico.

Is it possible to change my US tax status somehow, such that I would no longer pay state income taxes, unemployment insurance, etc, while continuing to pay US Federal income taxes? Perhaps by changing my address to somewhere in Guam, or some other US state/territory that doesn't charge such things? :)

I realize I could also change my tax status to paying taxes in Mexico, but then I would pay more, and it would make my immigration status much more complicated. And the Mexican government is completely content with me working in the US and paying US taxes. And no doubt the US is happy taking my tax money as well. So I don't feel I need to start paying taxes in Mexico to be "above board."

Answer 1

In the United States, individual States tax residents and non-residents. Many States tax residents on worldwide income, but non-residents are generally taxed on income sourced in that State only.

So if you're not a Kansas resident, then you only pay KS taxes on income you received in KS.

Kansas defines tax resident as follows:

A Kansas resident for income tax purposes is anyone who lives in Kansas, regardless of where he or she is employed. An individual who is away from Kansas for a period of time and has intentions of returning to Kansas is a resident.

The last sentence is the most interesting in your case. Generally, it is hard to prove intentions. You may want to keep your address and voting in Kansas, but I'm not sure if it shows that you have intentions of returning there. It may be just to keep you having any driving license and exercising your right to vote as a citizen.

You might want to consider not registering to vote in Kansas and give up your driving license (if you have another one in Mexico) to demonstrate that you don't have intentions of returning. But I am not sure if it is actually legally required of you.

In California (which I'm more familiar with), it is up to the FTB to prove your intentions if you stayed outside of California for more than 2 years (or even less, if I remember correctly). I believe in Kansas it would be similar - if they want to claim you're a resident, they'll have to prove your intentions.

Keep in mind, that if you're in Mexico on a temporary assignment (i.e.: You're not a Mexican citizen or emigrant into Mexico), then you do have intentions to return to Kansas by default. In this case - you are Kansas resident. Also, if you claim that you're non-resident for Mexican tax purposes and use a tax treaty (which it sounds like you do), it also shows your intentions to return.

If it is more than a trivial case - I'd suggest talking to a EA or a CPA licensed in Kansas to get a proper tax advice.

Answer 2

If you are employed through a company in Georgia you most likely have to pay taxes there. See this from Georgia's Department of Revenue website FAQs.

Q: What are the filing requirements for a nonresident who works in Georgia and/or has other Georgia source income?

A: Nonresidents, who work in Georgia or receive income from Georgia sources and are required to file a Federal income tax return, are required to file a Georgia income tax return. Some examples of Georgia source income are wages, Georgia lottery winnings, income from flow through entities (s-corporations, partnerships, LLC’s, trusts, and estates), rents, etc. If you are a legal resident of another state, you are not required to file a Georgia income tax return if your only activity for financial gain or profit in Georgia consists of performing services in Georgia for an employer as an employee when the compensation for services performed does not exceed the lesser of five percent of the income received in all places during the taxable year or $5,000.

For reasons given by littleadv I doubt you owe any Kansas state income tax because you don't reside there. If you would like to continue to vote, you might want to get a Georgia address (if you can get one for free) as it appears you have to pay taxes there anyways.

Answer 3

You will want to set up a domicile in the state that has the tax laws you want. When it comes to voting, you normally vote following the regulations of the state you most recently were a residence of if you are not a resident of any state.

We live in Mexico and there are a lot of people here that have South Dakota tags on their cars. You can register your car in South Dakota through the mail and set up 'residency' in South Dakota by staying one night in a hotel or campground and then show the receipt to the clerk when you apply for your driver's license the next day. Then you are allowed to vote in SD as well.

There are companies that specialize in providing a 'residential address' for you in South Dakota. They mostly do this for the RV crowd that travel the US and use SD as their base (SD also has really low vehicle taxes/fees on RV's). So with no personal income tax, you can set up residency in South Dakota.

Check out:

Mail Forwarding Services - Google Search

SD Drivers License - Note "People who travel full time" toward the bottom of the page

There are probably other states that you can do this in as well, but SD is the one I am most familiar with because it is so prominent with so many people around me here in Mexico.

Answer 4

The "intent to return" is state specific. Some states are tough on this. Without evidence you have established a residence elsewhere in the USA before you moved overseas some states won't give up their claim to such taxes. People, including a large number of active duty military establish (or attempt to establish) a domicile in a state without state income tax before moving overseas.

This link from the American Foreign Service Association includes some details

http://www.afsa.org/domicile.aspx

I tend to be a stickler for following the rules so I am sure plenty of others decide they have established a new domicile without really doing so. But I think the legal requirement are that you really do move to a new state. Just saying I live in "tax free place" while you are overseas is not really legal (it doesn't legally create a new domicile for you officially). If you don't rent and live in a new state for a reasonable amount of time it is questionable to claim you have a new domicile. Flying to your friend's state and staying at their house the week before you leave almost for sure doesn't. Moving to a new state and signing a new lease, getting a new driver's license, registering to vote, living there for a year and then moving overseas does.

In between those two situations is questionable. The closer you are to one than the other the more clear it is. I would also imagine practically the more money involved the more it matters (as does how vigorously the state in question polices this). I would imagine the more money involved the less a state is going to accept questionable claims of new domicile while the less money involved the more willing they will be to take a more forgiving approach. One of the truths is there are grey areas and the factors that come into play include how much money is at stake.

Answer 5

Other posters are correct when they say that different states handle this differently. But...

If you have really moved overseas, then why not simply move your finances overseas as well, stop filing state income taxes in Kansas-- EXACTLY as you would have done if you'd simply moved to another state instead of overseas-- and let the state figure out how to come after your money in Mexico? Hint: the US government can use FATCA to get you almost anywhere; your former (FORMER!) state doesn't have this ability. If the Kansas revenue service wants to knock on your door in Mexico, then you can cross this bridge when you come to it. Hint: it's not going to happen.

Answer 6

With the new law US citizens have have to pay taxes on any worldwide income.

Whether you will need to pay state taxes depends on whether you are still considered a legal resident of that state. As far as paying taxes in Mexico if you have a visa there you will need to check with the Mexican government.

Answer 7

hmm..isn't what you really want a foreign earned income exclusion?

if you stay outside the country for most of the year, you are eligible for a large income tax break. the federal government accepts this and many states do as well. it doesn't matter if you are paid by a us-based firm or a firm elsewhere.

http://www.irs.gov/uac/Five-Facts-about-the-Foreign-Earned-Income-Exclusion

it doesn't matter where your legal home is, it matters where you physically are. if you stay outside the united states for ~330 days, you get a federal tax break of $96,700.

http://www.irs.gov/pub/irs-pdf/p54.pdf#page=19

some states also allow this exclusion, others don't