We get asked constantly about the most TAX-FRIENDLY state to transfer residency when you are trying to leave the U.S. (either permanently or temporarily), or in the case of RV explorers and part-time snowbirds, the best state for retirees who only want to spend a few months out of the year in one place and the rest of the year in a warmer tropical climate.
Note: This advice is coming directly from our accountant, who also took the plunge and became a digital nomad several years ago and now works remotely year-round. This is not intended to be legal or tax advice, just general advice that anyone can verify themselves.
Top 5 Tax-Friendly States for Digital Nomads
1. Nevada: Best privacy, no personal income tax, no corporate income tax. Allows anonymous LLCs. Shareholders in a NV corporation can also remain anonymous.
2. Florida: No personal income tax. Does impose a 5.5% corporate income tax.
3. Texas: No personal or corporate income tax, but does levy a gross receipts tax.
4. Alaska: No personal income tax. There is a corporate income tax.
5. Wyoming: No corporate or personal income tax.
Our Accountant, Chris: If you plan to live the life of a snowbird or be a digital nomad, the best state to establish residency is Nevada. Nevada has no corporate or personal income tax as well as the best privacy laws. Nevada collects most of its revenue through sales taxes, as well as taxes on the casino and hotel industries. Nevada is the only state that does not share information with any other state or the IRS, and Nevada is one of the few states that allows anonymous LLCs. Shareholders in a Nevada corporation can also remain completely anonymous.
This can prevent unwanted individuals from having access to your private information, and it also cuts down on spam, unwanted mailings, and solicitations from businesses and individuals trying to sell you things when you open a new business (one of my pet peeves!).
All the major cities in Nevada (Las Vegas, Reno, Carson City) host several popular incorporation and mail forwarding services targeted towards expats and snowbirds that make transferring residency and setting up a corporation or other entity in Nevada very easy to do. Corporations and LLCs do have to file an annual list every year, which costs several hundred dollars, but can be filed online. If you don't have a corporation or an LLC, then it is much cheaper. In Las Vegas, for example, a home-based sole proprietorship or general partnership costs nothing to set up, the business license is free. And there are no state-level tax return filings in Nevada.
Nevada also has the benefit of several big cities and a wide range of climate and terrain. In Tahoe, you can enjoy beautiful mountains, skiing, fresh air, and the beautiful Lake Tahoe for fishing or water activities. If you like nightlife, or if you like live events, concerts, parties and gambling, there's Las Vegas. And everything in between.
Florida and Texas are close seconds, and preferable to Nevada in terms of climate if you want to live in the states at least part-time. Florida and Texas impose no personal state income tax, but they do have some types of franchise/corporate tax on a businesses' gross income.
Florida imposes a 5.5% corporate income tax. In Texas, businesses with $1.18 million to $10 million in annual receipts pay a franchise tax of 0.375% on their gross receipts.
Alaska isn't a bad choice, either. There's no personal income tax, but there is a corporate tax. Alaska imposes a corporate tax ranging from 0% to 9.4%, spread across ten tax brackets.
It's also less accessible than any of the lower 48 states. Actually getting to Alaska if you need to do anything related to your residency requires a long drive and a border crossing, or an airline flight over Canada. And the harsh Alaskan winters are not for the faint of heart. But to be fair, there are many people who love Alaska's unspoiled wilderness. Plus, the summers in Alaska are rumored to be absolutely spectacular.
Wyoming is also another good choice, from a tax perspective. This state also imposes no personal income tax, but the landscape is isolated and rather bleak, (I've driven through the whole state and there isn't much to see in Wyoming). So if you're not planning to actually live there at least part of the year, Nevada is a better choice in terms of privacy as well as tax benefits.
One of the most frequent questions we receive from American expats is what to do about taxes when you become an expat. When it comes to U.S. taxes, the answer is never simple! Today, we have a guest post by Inez Zemelman, EA, the founder of Taxes for Expats, a firm specializing in tax preparation for U.S. taxpayers who are living overseas.
Taxes for US citizens residing abroad is always a tricky subject. The following information is provided by Taxes For Expats -- They are a professional tax firm that work directly with expats in Mexico and taxpayers across the globe (they have clients in 175 countries) and they often get asked to break down the clunky IRS tax code & explain filing requirements for Americans who live outside the U.S. For more in depth info, please see their U.S. Tax Guide for 2017 for complete info.
(Note: Taxes for Expats is not affiliated with Expat Fever and has not paid a fee in order to be posted here.)
If you are self employed or have a job, you likely need to file a U.S tax return. If you are a US citizens or Green Card holder, you must (assuming you meet the minimum filing thresholds) file an annual tax return reporting your worldwide income from all sources. The minimum requirements are $4k USD for those who are married filing separately (generally those married to a non-US citizen), and $400 for those who are self employed. If you are single the threshold is $10k USD.
You must file - but you likely won’t pay (if your return is prepared correctly). There is a general misconception that you do not need to file if you earn under $100k. This is incorrect. You must file, but if you take advantage of the proper exclusions, most expats won’t end up paying any taxes to the IRS. To take advantage of these exclusions, you need to file; they are not automatically granted. Each year, you must continue to file if you meet the minimum filing requirements. Failure to do so can lead to penalties.
How do expat returns differ from a tax return when you live in the states?
Deadlines: For those residing abroad, tax due is June 15 (automatic two month extension is granted). Note - if you owe any tax, it is still due on April 15th, so get your returns done early in the year to avoid any unpleasant surprises. An additional extension until October is also available - this must be filed before June 15
Many deductions/exclusions available only to those residing abroad: The tax man giveth, but Uncle Sam does not give automatically. In order to benefit from the tax saving methods available - the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit, Foreign Housing Exclusion, Treaty exclusions, and many more - your tax return must be prepared correctly and tax saving tools utilized properly.
No W-2 (country equivalent) sent to the IRS: Unlike a U.S. employer which will issue a W-2 or 1099, which will be sent to the IRS and to you, your foreign employer will not provide you with such a form (and even if there is a local tax declaration, it does not get forwarded to the IRS). As such, you should keep accurate records of your finances. The U.S. calendar year remains Jan 1- Dec 31, and your local tax declaration may be on a different fiscal year (ie; Apr 1 - Mar 31); we have a special income calculator in our questionnaire that helps normalize your earnings to the U.S. calendar year.
Overall complexity: Living abroad has many benefits, but increased complexity of your U.S. tax return is not one of them. Chances are you have non-US pension, you may be self-employed or own a non-US corporation, or invest in non-US mutual funds - dubbed PFIC (foreign passive investment corporations). Finally, you likely contribute to a non-us social security system, and you need to read up on what totalization agreements are, along with calculating how to treat your employer contributions to your superannuation account and understanding the various tax treaties- it’s no fun; let us make this annoying process less painful.
Reporting your financial accounts - does not generate tax due: Aside from the filing of your returns, you also need to declare your non-US financial accounts (such as bank accounts, superannuation and any other non-US pension) to the U.S. treasury. Note - this does not cause you to owe tax - but you must report these balances. This reporting consists of two main forms --- FBAR (FinCEN 114) and FATCA (form 8938).
These two forms are similar, but have different filing thresholds (10k USD for FBAR - 8938 depends on your filing status and where you reside (see link above). 8938 is filed with your tax return, FBAR is filed separately.
Ines Zemelman, EA is the founder of www.taxesforexpats.com.
No website or company has paid a fee to be mentioned in this blog. Any suggestions you see are based solely on our own experiences and personal preferences.
Just a middle-class family with three young kids, looking to escape the rat race. This is our journey!
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