Author Topic: Moving out of USA - Need help in understand state residency and taxes  (Read 435 times)

movingtobangalore

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We plan on moving from New York to India permanently in the next 18 months hopefully with partial FIRE. I have the usual accounts many in this community have, like vanguard brokerage & IRA accounts. I also have my work 401k at Fido. I plan to open a virtual mailbox like traveling mailbox (TM) in 0% state like Florida before I move to India. My only relative is in Maryland and was thinking of giving his address in case some financial institution flags TM’s address and ask for a proper residential address. I wasn’t planning on legally establishing residency in any other state.
 I had three questions.

1.   When I move to India, for taxation purposes (I’ll still get dividends from vanguard), which state would I pay taxes; NY, MD or FL?
2.   I know just having a virtual mailbox at 0% state tax state like Florida doesn’t guarantee residency. So in order to get the tax benefits of FL, should I legally establish residency at FL? – This is not my preferred choice, but the tax benefits could force me to take this route.
3.   If I don’t legally change my residency from NY and open a TM address based in NY, but give my relative’s address in MD as an emergency residential address, will I pay NY state taxes? - This is my preferred choice since this involves least work from my side. :)

Any advise on the best strategy for my situation would immensely help.

Expert help from this community is greatly appreciated.

reeshau

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #1 on: January 07, 2019, 02:03:43 AM »
First question:  are you a citizen, or green card holder?  If so, you will have an ongoing oblication to manage this, until you renounce your citizenship, or as long as you want to maintain your green card.  If not, then you also could have the option to set up accounts as a non-US resident.

Residency does not have a single definition--it is a matter of opinion.  But New York, being a high tax state with a lot of non-resident taxpayers is very...active...in this.  The best way to insure you don't end up with a tax or legal headache is to look at residency rules (for tax purposes) in both NY and FL.

A quick Google confirms NY's strong gravitational pull on your tax dollars.  You need to make sure you have met their requirements to *not* be resident.  (or, specifically, not domiciled for tax purposes)  Fortunately, they have documented how:

https://www.tax.ny.gov/pit/file/pit_definitions.htm

While Florida is somewhat more easy-going, there is a process there, too:
https://www.stateofflorida.com/residency.aspx

So some of the things are obvious:  change your driver's license, change your voter registration.  But those facts aren't absolute.  Certainly, changing the address for any business correspondence you have also adds weight.  But simply registering to your Brother's address won't do it, either, although that may be a better choice than a mailing service.  You need as much evidence of your identity as possible to point to where you want to be established.

In a quick scan of NY form IT-203, I do see a hopeful exclusion to NY taxation for non-residents:

 interest, dividends, or other income from intangible personal
property, or gains from the sale or exchange of intangible
personal property, unless the intangible personal property is
employed in a business, trade, profession, or occupation in
New York State;

Maybe this means you don't need to worry about going to the extent of changing residency.  But, when the time comes to make withdrawals from your 401k, understand that *will* be income, not capital gains, so if you are NY domiciled, they will want their slice of that.  So I think the answer to question #3, if you don't take action, is yes--you would still pay NY taxes, even with an alternate mailing address.  But this will cost you when you withdraw your 401k, the full amount of NY's tax rate.

In the end, I think it's best to work with a CPA, at least for the transition year and first full year.  Even if you mean to manage this yourself in the future, they can give you a pattern to follow.  And maybe you won't trust yourself to follow through on all the necessary documentation, or keep up with the changes that will occur over time.  It will be expensive, but that's the cost of such an adventure.

MustacheAndaHalf

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #2 on: January 07, 2019, 02:15:22 AM »
I wouldn't put "renouncing citizenship" on the list of solutions.  All of the things that you own that haven't been taxed, get instantly taxed.  So if you have a 401(k), you pay taxes on the entire amount.  If you have a brokerage account, you pay taxes on any growth that hasn't been taxed yet.

I have the impression anyone can own ETFs, but only U.S. residents can own mutual funds.  So you might consider shifting to ETFs before your planned move, or researching that issue a bit.

Are you leaving anything behind in NY?  Do you own property, or a storage locker, or anything that hints you'll return?  Those things would be used against you to show you should continue paying taxes to NY.  If you move permanently out of NY, then you stop owing taxes there.

cap396

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #3 on: January 07, 2019, 05:19:48 AM »
We went through the same dilemma when we left North Carolina to move overseas.  We sold our property in North Carolina and used the Escapee's mail service in Florida to 1) get a Florida driver's license, 2) register to vote in Florida, and 3) declare our domicile in Florida.  Escapee's makes this process easy and provides you will all the steps and instructions to get those three things done.  But it does mean going to Florida for a day or two to go through the process.

I'm not a lawyer, but here are the answers to your questions to the best of my knowledge:

1) I think it depends on the state where your domicile is declared.
2) Yes, I think establishing full residency in Florida will be required.
3) New York has a reputation for scrutinizing residency requirements for those who claim they have moved out of state.  If you don't legally change your residency they could come after you for state taxes.  Here is a quote from an article regarding this: "Submitting a change-of-address form alone isn’t enough, nor is obtaining a new driver’s license or registering to vote in a new district, though checking those boxes is still important.  Instead, New York tax collectors look at five factors: homes that are owned, how time is spent, where favorite possessions are kept -– the so-called “teddy bear test” -- and business activities and family ties."

Here is a link to the article:
https://www.bloomberg.com/news/articles/2018-07-23/trapped-in-new-york-salt-cap-haters-find-moving-isn-t-that-easy

ROF Expat

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #4 on: January 07, 2019, 11:22:32 AM »
I second Reeshau's advice that you work with a good CPA with experience in these matters. 

Remember, you don't just have issues with changing your residence from New York, you will also have to file federal taxes in the US on income earned abroad.  You may not have to pay those federal taxes if there's a dual taxation treaty, and you might qualify for the Foreign Earned Income Exclusion, but you'll have to be outside of the US for at least 330 days over 12 consecutive months.  It gets complicated, and a good CPA will be well worth his/her fees. 

Some states look long and hard at folks who move to states without income tax.  It sounds like New York is one of them. 

movingtobangalore

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #5 on: January 07, 2019, 05:18:21 PM »
Great information. Thanks so much guys. Based on recommendations, here are some takeaways as i understood.

1. We are US citizens - We don't plan on renouncing our citizenships. We will be traveling post-FIRE. No house, no tangible property in NY - except two cars that will be sold when we move back.
2. I'll just setup a traveling mailbox in NY. I'll not do anything in regards to changing my NY residency. It looks like while I am residing in India, I may use Group B requirements to satisfy as a non-resident.
3. I will work in India at least for a few years & therefore will have income from India. I will work with a CPA to do my taxes at least for a few years post-FIRE.
4. Our source of income are investments and my wife's 457(b) (deferred comp, worth <$75K)

If there are any suggestions or recommendations you guys have, please let me know.


MustacheAndaHalf

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #6 on: January 09, 2019, 09:10:16 AM »
1. We are US citizens - We don't plan on renouncing our citizenships. We will be traveling post-FIRE. No house, no tangible property in NY - except two cars that will be sold when we move back.
I assume NY and CA are similarly aggressive.  If you move away, then move back, CA claims you should have been paying taxes the whole time.  Your return to a state proves you never really moved away... and if NY uses that approach, you might stop paying NY taxes only to have them ask for back taxes when you return.

So is your plan to pay NY taxes while you're living for a few years in India?

If you think somewhere besides NY is better post-FIRE (less expensive?), you can save a lot in taxes.  You would sell your 2 cars before moving, leaving nothing behind in NY.  And you would have no plans to return to NY.  When you leave NY, you stop paying NY taxes.  When you move back to the U.S., don't move back to NY - set up residency in another state.  And then you've avoided the problem of back taxes, since you never intended to return to NY.

Another possibility is that your income in India doesn't matter.  If it falls below the foreign income exemption, you won't pay Federal taxes on it.  And I would assume you don't pay NY tax on it either, but it's worth checking on that.  So maybe all your activity overseas doesn't have a tax impact (but your investments will still be taxed).

Padonak

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #7 on: January 09, 2019, 10:44:18 AM »
Ptf

I'm a red panda

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #8 on: January 09, 2019, 10:54:06 AM »
I'd take the time to move to Texas or Florida and set up residence there before moving to India.
Not having to deal with state income taxes is going to save you a lot.

Storing your cars in NY proves to NY that you didn't move to Florida.

reeshau

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #9 on: January 09, 2019, 12:24:09 PM »
Another possibility is that your income in India doesn't matter.  If it falls below the foreign income exemption, you won't pay Federal taxes on it.  And I would assume you don't pay NY tax on it either, but it's worth checking on that.  So maybe all your activity overseas doesn't have a tax impact (but your investments will still be taxed).

Rather, assume the opposite.  Tax treaties are between the Federal government and foreign countries, not states.  State taxes generally start with AGI, so FEIE can be useful to reduce it, but going with the foreign tax credit means your full foreign earnings will show up as AGI.  It was definitely a reason I left Michigan for Texas, before Ireland.

flipboard

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Re: Moving out of USA - Need help in understand state residency and taxes
« Reply #10 on: January 11, 2019, 01:04:04 PM »
I wouldn't put "renouncing citizenship" on the list of solutions.  All of the things that you own that haven't been taxed, get instantly taxed.  So if you have a 401(k), you pay taxes on the entire amount.  If you have a brokerage account, you pay taxes on any growth that hasn't been taxed yet.

I have the impression anyone can own ETFs, but only U.S. residents can own mutual funds.  So you might consider shifting to ETFs before your planned move, or researching that issue a bit.

Are you leaving anything behind in NY?  Do you own property, or a storage locker, or anything that hints you'll return?  Those things would be used against you to show you should continue paying taxes to NY.  If you move permanently out of NY, then you stop owing taxes there.
1. Isn't necessarily true. Exit tax only kicks in under certain scenarios, the relevant one for Firee's is probably > $2 million assets per person.

2. Yes and no. Only US residents can buy mutual funds (some people just don't tell their broker they left though). But I'm yet to hear of anyone being forced to liquidate their holdings. ETF's indeed can be bought by most people, but there are some catches e.g. EU brokers won't sell US ETF's to EU residents due to certain documentation requirements that US ETF providers don't conform to. (Solution: find a non-EU broker that will accept you as a non-EU resident as a customer - which ain't easy because a few of the US brokers that accept non-US resident customers happen to have an EU office subjecting them to EU rules.)

Which actually opens up the whole topic of brokers: as soon as Vanguard find out you've moved, they will most likely tell you to get lost, followed by burying their heads in the sand. (AKA they'll stop you from trading - although I don't think they close people's accounts.) It's probably worth finding a better broker before moving - Fidelity are apparently OK for people not residing in the USA, Schwab support a bunch of countries, IB do too.