The Foreign Service Journal, January-February 2017

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2017 67 STATE TAX PROVISIONS Liability: Every employer, including the State Department and the other foreign affairs agencies, is required to withhold state taxes for the location where the employee either lives or works. Employees serving overseas, however, must maintain a state of domicile in the United States where they may be liable for income tax; the consequent tax liability that the employee faces will vary greatly from state to state. Further, the many laws on taxability of Foreign Service pen- sions and annuities also vary by state. This section briefly covers both those situations. (See separate box on Tax With- holding When Assigned Domestically.) Domi c i l e and Res i den c y There are many criteria used in determining which state is a citi- zen’s domicile. One of the strongest determinants is prolonged physical presence, a standard that Foreign Service personnel fre- quently cannot meet due to overseas service. In such cases, the states will make a determination of the individual’s income-tax status based on other factors, including where the individual has family ties, has been filing resident tax returns, is registered to vote, has a driver’s license, owns property, or has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which the person joined the Service, where his or her home leave address is or where he or she intends to return upon separation. For purposes of this article, the term “domicile” refers to legal residence; some states also define it as permanent residence. “Residence” refers to physi- cal presence in the state. Foreign Service personnel must con- tinue to pay taxes to the state of domicile (or to the District of Columbia) while residing outside of the state, including during assignments abroad, unless the state of residence does not require it. Members are encouraged to review the Overseas Briefing Center’s Guide to Residence and Domicile, available on AFSA’s website at www.afsa.org/domicile. Domes t i c Emp l oye es i n t he D.C . A r ea Foreign Service employees residing in the metropolitan Wash- ington, D.C., area are generally required to pay income tax to the District of Columbia, Maryland or Virginia, in addition to paying tax to the state of their domicile. Virginia requires tax returns from most temporary resi- dents, as well. Most states allow a credit, however, so that the taxpayer pays the higher tax rate of the two states, with each state receiving a share. We recommend that you maintain ties with your state of domicile—by, for instance, continuing to also file tax returns in that state if appropriate—so that when you leave the D.C. area for another overseas assignment, you can demonstrate to the District of Columbia, Virginia or Maryland your affiliation to your home state. Also, if possible, avoid using the D.C. or Dulles VA pouch zip code as your return address on your federal return because, in some cases, the D.C. and Virginia tax authorities have sought back taxes from those who have used this address. See box on page 66 for new procedures within the State Department for state tax withholdings. S t a t es Tha t Have No I n come Ta x There are currently seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee have no tax on earned income, but do tax profits from the sale of bonds and property. S t a t es Tha t Do No t Ta x Non - Res i den t Domi c i l i a r i es There are 10 states that, under certain conditions, do not tax income earned while the taxpayer is outside the state: Cali- fornia, Connecticut, Idaho, Minnesota, Missouri, New Jersey, New York, Oregon, Pennsylvania (but see entry for Pennsylva- nia below) and West Virginia. The requirements for all except California, Idaho and Oregon are that the individual should not have a permanent “place of abode” in the state, should have a permanent “place of abode” outside the state, and not be physically present for more than 30 days during the tax year. California allows up to 45 days in the state during a tax year. All 10 states require the filing of non-resident returns for all income earned from in-state sources. Foreign Service employ- ees should also keep in mind that states could challenge the status of overseas government housing in the future. In “State Overviews” you will find brief state-by-state information on tax liability, with addresses provided to get further information or tax forms. Tax rates are provided where possible. As always, members are advised to double-check with their state’s tax authorities. While AFSA makes every attempt to provide the most up-to-date information, readers with specific questions should consult a tax expert in the state in question. We provide the website address for each in the state-by-state guide, and an email address or link where available. Some states do not offer email customer service. We also recommend the Tax Foundation website at www. taxfoundation.org, which also provides a table showing 2016 tax rates for all states.