The Foreign Service Journal, January-February 2022

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2022 67 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 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 pensions 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 AFSA website.) Domicile & Residency Many criteria are used in determining which state is a citizen’s domicile. One of the strongest determinants is prolonged physi- cal 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 where the per- son has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which they joined the Service, where their home leave address is or where they intend to return upon separation. For purposes of this article, the term “domi- cile” 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 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 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, Maryland or Virginia your affilia- tion 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 authori- ties have sought back taxes from those who have used this address. States That Have No Income Tax 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. States That Do Not Tax Non-Resident Domiciliaries There are 10 states that, under certain conditions, do not tax income earned while the taxpayer is outside the state: Califor- nia, Connecticut, Idaho, Minnesota, Missouri, New Jersey, New York, Oregon, Pennsylvania (but see entry for that state below) andWest Virginia. The requirements for all except California, Idaho and Oregon are that the individual should not have a per- manent “place of abode” in the state, should have a permanent “place of abode” outside the state, and should 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. The “State Overviews” section, below, gives brief state-by- state information on tax liability, with addresses provided for 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 state’s tax authority in the state-by-state guide, and an email address or link where available. Some states do not offer customer service via email. We also recommend the Tax Foundation website at www. taxfoundation.org, which provides a great deal of useful information, including a table showing tax rates for all states for 2021 at https://taxfoundation.org/publications/state- individual-income-tax-rates-and-brackets/.