Note to Readers:
This is a follow-on article to my two other income tax related articles of this year – Tax Time, 2014 Style and Tax Time Continues . . .. While I didn’t intend to turn Tuesdays into “More Tax Articles Day” here at Live in the Philippines, it sure seems like it. Mea Culpa! We should be returning to some less boring / more interesting “stuff” next week. For now, I ask your indulgence.
As I had mentioned in an earlier article, I really do have a virtual storehouse of tax-related questions and their related answers. As we are now “officially” in “tax filing season,” those Qs and As become quite relevant and, not surprisingly, similar Qs keep showing up in my inbox. Additionally, experience has taught me that for every question asked, over ten questions go un-asked. Most of those ten are closely related to the question asked, only differing on a personal note.
With the genesis of the Internet, the World Wide Web and Websites galore came a method of getting information “out there” that was based on the Web surfer’s curiosity. Though not really unique to the Web – this platform has been around, in one form or another, for at least as long as man had a question – it has certainly flourished there. It’s the “Frequently Asked Questions” or “FAQs” platform, and it handled those questions that were asked. So, what about those ten plus that aren’t? That’s where my “FUAQs” steps in: “Frequently Un-Asked Questions” need their exposure, too!
Thus it’s FUAQs (pronounced, “fwacks”) supporting the FAQs (pronounced, “facks”). Kinda cute, I’d say.
HEY, PAUL, LET’S HAVE THE FUAQs, HUH?
Okay, here we go. This article will deal with the question discussed last week regarding state income taxes and what residency status means in paying state income tax.
Q. I read what you wrote last week, and I’m still confused. Discussions with fellow ex-pats over early morning coffee is all about taxes this time of year. Many of my fellow ex-pats believe that one “has to be” a resident of a state with regard to taxes, and it’s best to do whatever you can to show that you are a resident of a state that doesn’t have individual income taxation. How do you square with that?
A. Before we go too much further, we’ll have to establish some facts about state income taxes to help ease the sting of your fellow ex-pats’ speculations. Tax agencies, be they the IRS or the various state and local tax agencies, are feared by most taxpayers. That fear brings on speculation of various tax-related requirements which often end up deferring to the tax agency whenever doubt or confusion exists. Often this speculation and deference results in inaccurate or bogus factoids being spread around as “gospel.”
Here are some facts that you should know and refer to whenever discussing state income taxes:
- Every state that has an individual income tax (43 at last count) is different – in name, in size, in location and, most importantly, in how they administer their state income tax program.
- On average, a correlation can be drawn between a state’s population and the complexity of that state’s individual income tax program.
- States, especially the ones with larger populations, are more aggressive in obtaining individual income tax revenue than the federal government or their less populated counterparts.
- Though many states may refer to its population as its “citizens,” such citizens are technically citizens of the United States and not of the state in question.
- In reality, state individual income tax liability is not based on an individual’s citizenship but is based on an individual’s residency status.
- There is absolutely NO REQUIREMENT for a U.S. citizen to be a resident of any state.
With that out of the way, we can continue with answering the question.
As you’ve read in the facts that I provided, a requirement by any governmental agency for a U.S. citizen to be a resident of any state just does not exist. There is no such requirement recorded in writing on the law books within this country, especially within its states. This bit of speculation is based on a twist of what is true: For state individual income tax purposes, every state having such a tax requires everyone to have a specific residency status with regard to that state.
Now that sounds a bit foolish, confusing, or even like it is far-fetched horse manure, but it is true. Stop to think for a moment. Say you are a resident of the State of Florida, a non-individual income tax state. For each and every one of the 43 states that have an individual income tax (and for those others that don’t) your residency status, by law, is that of a nonresident. After all, a state has to be able to identify who is and who isn’t a taxpayer for that state. They do this via residency status.
Differences among the states with regard to state individual income taxation is not based on whether or not an individual income tax exists. It is based on what the state deems taxable with regard to an individual’s income. Those few states who “don’t have any state income tax” technically may have one.
Their laws, however, stipulate that they do not deem any part of a resident’s, nonresident’s, or part-year resident’s income as taxable. Yes, believe it or not, state tax laws are written like that – there is always the chance that a state will tax part or all of a resident’s income, so it is easier to change the “what gets taxed” part of the law than it is instituting a whole new section of law dealing with taxation.
A good example of the above statement is the State of Florida. Though a state individual income tax is prohibited by the state constitution, the state did tax individuals on intangible property (investments, dividends, mutual funds, &c.) until 2007. There is always a hook there somewhere, and a wily politician could easily hang something on that hook to be taxed.
One of the more factual websites on the Internet with regard to state individual taxation is that belonging to the Retirement Living Information Center.
THIS WEEK’S TAKE AWAY
Again, not enough time or column space for everything that pertains to the single question asked. However, the important parts were there. They are:
- When it comes to income taxation, all states are different in their administration of a tax program.
- U.S. citizens are NOT REQUIRED to be a resident of any state for income tax purposes.
- Lacking state residency, a U.S. citizen is, by the various states’ tax laws, deemed a nonresident of each state.
While nonresidents of some states may be liable for the associated state’s individual income tax on specific items or income, (e.g., income sourced to that state), some states absolve a nonresident from their individual income tax requirements. Check to see if you are a resident, part-year resident, or nonresident of the state you left and see what tax liabilities you may or may not have. It’s always good to know this – better safe than sorry!