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State residency and foreign taxes


Dear Tax Talk,
I will be relocating overseas in a few months, working for a domestic global company, and I have to claim my state of residency for tax purposes. I currently live in California, but have been advised by my brother-in-law (frightening, I know) to claim Nevada as my residency because it does not have a state income tax (which, I'm told by my company, I will still have to pay). With the current situation in California, I'm afraid taxes most likely will be rising, making the Nevada idea more appealing. What would be the hidden problems, costs and issues with claiming residency in a state to which I only have a few ties, one in which I don't technically live ... yet? -- Susan

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Dear Susan,
California needs you, but do you need California? As Gray Davis recently said, "My vision is to make the most diverse state on earth, and we have people from every planet on earth in this state." Well, if you're planet shopping, your frightening brother-in-law has the right idea and your governor probably just gave you incentive.

In today's global economy, tax obligations of U.S. citizens abroad (and vice versa) is a popular topic. You can check some of my earlier columns for the many questions I have received on this topic.

To save you some time, here's a refresher on how you'll be subject to tax when you live abroad:

If you're out of the country for 330 days within 365 days, you can exclude your foreign-earned income on Form 2555 up to $80,000. Alternatively, if you don't meet the time-frame rule but you're a U.S. citizen and you establish foreign residency in a foreign country for an entire tax year, you can also qualify for the exclusion. This means that if you qualify for the exclusion, you won't owe federal or state income taxes on your wages whether you move to Nevada or not. Although your employer is withholding state income taxes, you should claim sufficient exemptions on your W-4 to avoid having taxes withheld for both the Internal Revenue Service and the state at least up to the exclusion.

If you won't qualify for the exclusion, you could get around California taxes using the Nevada solution. This assumes you have no immediate intentions of returning to California except to visit or for occasional business meetings. This means you have to abandon your state of California residency, but considering the current political climate, it's probably not a bad decision. You can establish residency in Nevada by having a physical address in Nevada, registering to vote, getting a license, registering your cars and insuring them in Nevada and, among other things, learning to play craps.

-- Posted: Oct. 7, 2003




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