The Foreign Service Journal, February 2004

6 AFSA NEWS • FEBRUARY 2004 questions about their liability to pay state income taxes during periods posted over- seas or assigned toWashington. It is a fun- damental rule of law that all U.S. citizens must have a domicile somewhere. There aremanycriteriaused indeterminingwhich state is a citizen’s domicile. One of the strongest determinants is prolonged phys- ical presence, a standard that Foreign Service personnel frequently cannot meet, due to overseas service. Insuchcases,thestateswillmakeadeter- minationof the individual’s income tax sta- tus basedonother factors, includingwhere the individual has family ties, where he or shehasbeenfilingresidenttaxreturns,where he or she is registered to vote or has a dri- ver’s license, where he or she owns prop- erty, orwhere thepersonhasbankaccounts 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, orwhere he or she intends to return upon separation. For purposes ofthisarticle,thetermdomicilereferstolegal residence; some states also define it as per- manent residence. Residence refers tophys- ical presence in the state. ForeignServicepersonnelmustcontinue to pay taxes to the state of domicile (or to theDistrictofColumbia)whileresidingout- side of the state, including during assign- ments abroad, unless the state of residence does not require it. A non-resident, according to most states’ definitions, is an individualwhoearns income sourcedwithin the specific statebut does not live thereor is living there for only part of the year (usually, less than six months). Individuals are generally con- sidered residents, and are thus fully liable for taxes, if they are domiciled in the state or if they are living in the state (usually at least six months of the year) but are not domiciled there. ForeignServiceemployeesresidinginthe metropolitanWashingtonareaare required topay income tax to theDistrict,Maryland orVirginia, inaddition topaying tax to the stateof theirdomicile. However,moststates allowa credit, so that the taxpayer pays the higher tax rate of the two states, with each state receiving a share. There are currently seven stateswithno state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee have no tax on personal income but do tax profits from the sale of bonds and property. Therearealsosixstateswhich,undercer- tain conditions, do not tax income earned while the taxpayer is outside of the state: Connecticut, Missouri, New Jersey, New York, PennsylvaniaandWestVirginia. The requirements are that the individual not have a permanent “place of abode” in the state, have a permanent “place of abode” outside the state, andnot spendmore than 30days inthe stateduring the taxyear. Also, please note that these six states require the filingof non-resident returns for all income earned from in-state sources. Pennsylvania holds that “quarters pro- videdby the government at no cost topeti- tioner cannot be considered as maintain- ing a permanent place of abode.” Thus members of the Foreign Service domiciled inPennsylvaniawho occupy government housing overseas must pay income tax to Pennsylvania. If they rent their ownhome overseas, however, they will be exempt from these taxes. AFSA has not heard of a similar ruling in any of the other five states, but Foreign Service employees shouldbe aware that states could challenge the status of government housing in the future. California, Oregon andMinnesota alsohave rules excusing their domiciliaries from filing a resident tax returnwhile liv- ing outside the state. The following list gives a state-by-state overviewof the latest informationavailable on tax liability, with addresses provided to write for further informationor tax forms. Tax rates are providedwhere possible. For further information, please contactAFSA’s Labor Management Office or the individ- ual state tax authorities. As always, mem- bers are advised todouble-checkwith their states’ tax authorities. James Yorke, who compiled the tax guide, would like to thank M. Bruce Hirshorn, Foreign Service Tax Counsel, for his help in preparing this article. State Overviews ALABAMA : Individuals domiciled in Alabama are considered residents and are subject to taxontheir entire income regard- less of their physical presence in the state. Alabama’s tax rate ranges from2 to 5 per- cent depending on income and filing sta- tus. Write: Alabama Department of Revenue, P.O. Box 327460, Montgomery, AL 36132-7460. Phone: (334) 242-1170. E-mail: erohelpdesk@revenue.state.al.us Web site: www.state.al.us ALASKA : Alaska does not tax individ- ual income, or intangibleorpersonal prop- erty. It has no sales and use, franchise or fiduciary tax. Write: StateOffice Building, 333WilloughbyAve, 11thFloor, P.O. Box 110400, Juneau, AK 99811-0400. Phone: (907) 465-2300. Web site: www.state.ak.us/tax ARIZONA : Individuals domiciled in Arizona are considered residents and are taxedonany income that is included in the federalAGI, regardlessof theirphysical pres- ence in the state. Arizona tax rate ranges from 2.87 to 5.04 percent depending on income and filing status. Write: Arizona Department of Revenue, Taxpayer Infor- mation & Assistance, P.O. Box 29086, Phoenix, AZ 85038-9086. Phone: (602) 255-3381. E-mail: TaxpayerAssistance@revenue. state.az.us Web site: www.revenue.state.az.us ARKANSAS : Individuals domiciled in Arkansas are considered residents and are taxed on their entire income regardless of their physical presence in the state. The Arkansas tax rate ranges from 1 to 7 per- cent depending on income and filing sta- tus. For 2003, there is alsoa surtaxof 3per- cent of computed tax. Write: Department ofFinanceandAdministration, IncomeTax FormsDivision, P.O. Box3628, LittleRock, AR72203-3628. Phone: (501) 682-1100or 1(800) 882-9275. Web site: www.state.ar.us/dfa/taxes CALIFORNIA : Foreign Service employ- ees domiciled in California must establish non-residency to avoid being liable for California taxes (see FTB Publication 1031). However, a “safeharbor”provision was introduced in1994,whichprovides that anyonewho is domiciled in-statebut is out of the stateonanemployment-relatedcon- tract for at least 546 consecutive days will be consideredanon-resident. This applies tomostFSemployees andtheir spouses, but CaliforniaresidentsareadvisedtostudyFTB Pub 1031 for exceptions and exemptions.