The Foreign Service Journal, January-February 2021

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2021 69 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. Employees serving overseas, however, must main- tain 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 pensions and annuities also vary by state. This section briefly covers both those situations. (In addition, see sepa- rate box on state tax withholding for State employees, and we encourage you to read the CGFS Knowledge Base article on the Tax Guide page of the AFSA website.) Domicile and Residency There are many criteria used in determining which state is a citizen’s domicile. One of the strongest determinants is prolonged physical presence, a standard that Foreign Service personnel frequently cannot meet due to overseas service. In such cases, the states will make a determination of the indi- vidual’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. 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 Proce- dures for Withholding and Reporting Employees’ State and District of Columbia Income Taxes,”Announcement No. 22394 (Nov. 4, 2014; available via the intranet). This announcement reflects some jurisdictions’ 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 jurisdictions. If you reside or are domiciled in a jurisdic- tion 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 Knowl- edgebase (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 cir- cumstances, it is the employee’s responsibility to accurately designate a state for which income taxes will be withheld. Upon the employee’s return to a domestic assignment, how- ever, CGFS will evaluate the employee’s state tax withhold- ing election based on his or her new official domestic duty station pursuant toAnnouncement No. 22394. Finally, this determination does not mean that you must relinquish your state of domicile if it is different from your official duty station. “Domicile” and “resi- dence” 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 withholding back, if you wish, 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. n TAX WITHHOLDING WHEN ASSIGNED DOMESTICALLY For purposes of this article, the term “domicile” refers to legal residence; some states also define it as permanent resi- dence. “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 resid- ing outside the state, including during assignments abroad, unless the state of residence does not require it. Members are encouraged to review the Overseas Brief- ing 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 employees residing in the metropolitan Washington, D.C., area are generally required to pay income tax to the District of Columbia, Maryland or Virginia, in addi- tion to paying tax to the state of their domicile. Virginia and Maryland require tax returns from most temporary residents as well. Most states allow a credit, how- ever, 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, Maryland or Virginia your affilia- tion to your home state. Also, if possible, avoid using the D.C. or Dulles, Virginia,