The Foreign Service Journal, January-February 2019

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2019 75 2018 STATE TAX PROVISIONS Liability Every employer, including the State Department and other foreign affairs agencies, is required to withhold state taxes for the location where the employee either lives or works. Employ- ees serving overseas, however, must maintain a state of domi- cile in the United States where they may be liable for income tax; the consequent tax liability that employees face 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; in addition, see the separate box on state tax withholding for State employees.We also encourage you to read the CGFS Knowledge Base article on the Tax Guide page of the AFSAwebsite. Domicile and Residency There are many criteria used in determining which state is a citizen’s domicile. One of the strongest determinants is pro- longed physical presence, a standard that Foreign Service per- sonnel frequently cannot meet due to overseas service. In such The State Department withholds an employee’s state taxes according to his or her “regular place of duty” when assigned domestically—for details, see “New Procedures for Withholding and Reporting Employees’ State and District of Columbia Income Taxes,” Announcement No. 22394 (Nov. 4, 2014; available via the intranet). This reflects some juris- dictions’ imposition of income taxes on nonresidents who derive income within their boundaries despite residence or domicile elsewhere. Members residing or domiciled in a jurisdiction other than the one in which they earn income may need state taxes to be withheld for their residence and domicile juris- dictions. If you reside or are domiciled in a jurisdiction other than that of your regular place of duty, you may secure an exemption from this withholding method by satisfying the requirements detailed by CGFS Knowledgebase (available via the intranet at http://kb.gfs.state.gov/) Issue 39479. Note that the Bureau of the Comptroller and Global Financial Services does not adjudicate state income tax elections when you are serving overseas, since in those circumstances, it is the employee’s responsibility to accurately designate a state for which income taxes will be withheld. However, on the employee’s return to a domestic assignment, CGFS will evaluate the employee’s state tax withholding election based on his or her new official domestic duty station pursuant to Announcement No. 22394. Finally, this determination does not mean that you must relinquish your state of domicile if it is different than your official duty station. “Domicile” and “residence” are different from “regular place of duty.” As long as you maintain your ties to your home state you will be able to change your withholdings, if you so wish, back to your home state when you go overseas. See the Overseas Briefing Center’s guide to Residence and Domicile, avail- able on AFSA’s website at www.afsa.org/domicile. 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 where the person has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state fromwhich 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 physical presence in the state. Foreign Service personnel must continue 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. Domestic Employees in the D.C. Area Foreign Service members residing in the metropolitanWash- 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 frommost temporary residents. TAX WITHHOLDING WHEN ASSIGNED DOMESTICALLY