Do expats from Arizona still need to pay state taxes?

If you’ve moved from Arizona to live abroad, it’s important to know if you still need to pay state taxes.

Even though you live in another country, you might still owe taxes to Arizona.

Understanding your tax obligations can help you avoid unexpected bills and comply with the law.

TLDR:

Understanding Arizona's tax residency rules

Residency and domicile are critical in determining Arizona tax obligations. Residency refers to where you live, while domicile is your permanent home where you intend to return after any absence.

Definition of residency and domicile

Residency: Residency is where you live, either temporarily or permanently. It is based on physical presence in a particular place.

Domicile: Domicile is your permanent home, the place you intend to return to and stay indefinitely. You can only have one domicile at a time, but you can have multiple residences.

You can be a resident of several places, but you can only have one domicile. Domicile requires intent to remain permanently

Resident

Domicile: You are considered a resident of Arizona if your domicile, or permanent home, is in Arizona. Your domicile is where you intend to return after any temporary or long-term absences.

Physical Presence: If you spend more than 183 days in Arizona during the tax year, you may be considered a resident for tax purposes, even if your domicile is elsewhere.

AGI and State Taxes: Arizona calculates state taxes based on your federal adjusted gross income (AGI). Any foreign income excluded on your federal return is also excluded from your Arizona return.

For expats: If Arizona was your last state of residency before moving abroad, you may still be considered an Arizona resident for tax purposes if you have not established a domicile in another state.

Nonresident

• No Domicile in Arizona: You are a nonresident if your domicile is not in Arizona and you do not maintain significant ties to the state.
• Limited Physical Presence: If you spend fewer than 183 days in Arizona during the tax year, you may be considered a nonresident.

Nonresidents are only taxed on income originating from Arizona sources, such as wages earned in Arizona or income from property located in the state.

Part-Year Resident

If you live in Arizona for part of the year, you pay state taxes on all income earned while you are a resident. For the time you are not a resident, you only pay taxes on income from Arizona sources. This means your tax responsibility is split based on your residency status throughout the year.

What constitutes Arizona-sourced income?

Understanding what constitutes Arizona-sourced income is essential for nonresidents and part-year residents to accurately determine your tax obligations.

Arizona-sourced income refers to any income derived from activities or assets located within the state. 

Here are some key categories to consider:

• Wages and Salaries: Money earned for services performed in Arizona.
• Business Income: Income from business activities conducted in Arizona.
• Real Estate: Rental income from property located in Arizona.
• Capital Gains: Profits from the sale of real estate or tangible property in Arizona.
• Dividends and Interest: Dividends from Arizona-based companies and interest earned from Arizona financial institutions.
• Pensions and Retirement Plans: Retirement income from Arizona institutions or for services performed in the state.

Why should you move domicile to a state with zero state income tax?

State income tax savings

For retirees and high-income individuals, relocating to states without income taxes like Florida, Texas, or Nevada can lead to significant financial benefits. Without state income taxes, you can retain more of your earnings, allowing you to invest more or enjoy a better lifestyle.

This is especially useful for those with incomes above the Foreign Earned Income Exclusion (FEIE) limit of $126,500 for 2024. By residing in a no-income-tax state, you can protect more of your income from taxation, increasing your financial freedom and investment opportunities.

Inheritance tax benefits

States such as Florida and Texas not only do not have state income taxes but also do not levy state estate taxes. This can reduce the tax burden on your estate, ensuring more wealth is transferred to your heirs. This is a considerable advantage for individuals with substantial assets.

Flexibility and mobility

Relocating your domicile to a state without income taxes enhances your ability to travel and live in different locations without the concern of hefty state tax bills. This is ideal for high-income earners with business interests across various states or countries and for retirees who want to spend their later years exploring new places.

Additionally, the absence of state income taxes simplifies your tax filing process. You will only need to file federal taxes, reducing the complexity and potential for errors in your tax returns, making financial management more straightforward.

How to leave Arizona tax residency?

Here are the key steps to help you transition:

1) Establish new residency

• Secure a Residential Address: Obtain a residential address in your new state. This is crucial for establishing a new domicile. Consider using a domicile service that provides a residential address, assists with mail forwarding, and helps establish your new residency.
• File a Declaration of Domicile if required: Some states require you to file a declaration to confirm your new domicile. This usually involves signing an affidavit stating that you intend to make the new state your permanent home.

Reference guides may provide additional help for specific states:

• Florida residency guide
• South Dakota residency guide
• Texas residency guide
• Nevada residency guide

2) Sever ties with Arizona

• Sell or rent out property: If you own property in Arizona, consider selling it or renting it out. Ownership of property in Arizona can indicate ongoing ties to the state.
• Transfer IDs and registrations: Update your driver’s license and vehicle registration to your new state. This shows your commitment to your new domicile.
• Register to vote: Register to vote in your new state. Voting registration is a strong indicator of your intent to establish residency.
• Update personal documents: Change your address on all identification cards, medical records, insurance policies, financial documents, and other important records.

3) Inform relevant parties

• Inform your employer: Notify your employer about your new residency. This affects how your income is taxed and helps establish your new domicile.
• Notify the IRS: Inform the IRS of your address change using Form 8822. Extend this notification to all personal and professional entities.
• Update all personal and professional entities: Inform banks, investment accounts, insurance companies, and other relevant entities about your change of address.

4) Keep detailed records

• Maintain documentation: Keep receipts, bills, lease agreements, and other legal documents that prove your new residency. Detailed records are essential if your residency status is questioned.
• Document your movements: Document your time spent in and out of Arizona. This includes travel records, utility bills, and any other documents showing your physical presence in your new state.

5) Be prepared for audit

If the Arizona Department of Revenue questions your residency status, be prepared to provide comprehensive proof that you have permanently moved out of Arizona.

• Proof of permanent move: Be ready to provide extensive documentation showing you have permanently moved out of Arizona. This includes all paperwork proving you have established a new domicile and severed ties with Arizona.
• Respond to inquiries: If the Arizona Department of Revenue questions your residency status, respond promptly and thoroughly with all necessary documentation to avoid potential penalties.

Tax benefits and exemptions for expats from Arizona

Living abroad as an expat comes from Arizona with various tax benefits and exemptions that can help reduce your overall tax burden.

Here are some of the key tax advantages available:

Foreign Earned Income Exclusion (FEIE)

The FEIE allows U.S. taxpayers living abroad to exclude a certain amount of their foreign-earned income from U.S. federal income tax. 

For the tax year 2024, this exclusion amount is up to $126,500.

To qualify, you must pass either:

• Bona Fide Residency Test: You qualify if you are a resident of a foreign country for an uninterrupted period that includes an entire tax year.
• Physical Presence Test: You qualify if you are physically present in a foreign country for at least 330 full days during a 12-month period.

FEIE Guide

Foreign Tax Credit (FTC)

The FTC helps you avoid double taxation by allowing you to take a credit for foreign taxes paid on income that is also subject to U.S. federal tax.

This credit can reduce your U.S. tax liability significantly, especially if you reside in a country with high tax rates.

FTC Guide

Foreign Housing Exclusion (FHE)

The FHE allows you to exclude certain housing expenses from your federal and state taxable income, including rent, utilities (excluding telephone), and other reasonable expenses related to housing abroad.

The amount you can exclude is limited to a base amount plus housing expenses exceeding 16% of the FEIE limit.

FHE Guide

Filing Arizona state taxes from abroad

When filing Arizona state taxes from abroad, it's essential to determine your residency status and use the appropriate forms:

• Form 140: This form is for full-year residents of Arizona. If you are considered a resident for tax purposes, you must report all income, regardless of where it was earned.
• Form 140PY: This form is for those who lived in Arizona for part of the year and need to report income earned while in Arizona.
• Form 140NR: This form is for individuals who did not live in Arizona during the tax year but earned income from Arizona sources.

Deadlines

• Standard Deadline: April 15. The deadline for filing Arizona state taxes aligns with the federal tax deadline. This is the due date for both filing your return and paying any taxes owed.
• Automatic Extension for Expats: June 15. If you are living outside the U.S. on April 15, you may receive an automatic two-month extension to file your return and pay any amount due without requesting an extension, extending the deadline to June 15. However, interest on any unpaid taxes will accrue from the original April 15 deadline.
• Additional Extension: You can request a further extension by filing Form 204, which extends the deadline to October 15. However, this extension is only for filing your return, not for paying any taxes owed. Interest on unpaid taxes will continue to accrue from the original April 15 deadline.
• Payment Deadlines. Regardless of filing extensions, any taxes owed must be paid by April 15 to avoid interest and late payment penalties. If you file an extension, ensure that your payment is postmarked by the due date to avoid additional charges.

Consequences of non-compliance with Arizona state tax laws

• Late Filing Penalty: If you file your Arizona state taxes late, you will incur a penalty of 4.5% of the tax due for each month or part of a month that your return is late, up to a maximum of 25% of the unpaid tax. This penalty applies from the original due date of the return until the date it is filed.
• Late Payment Penalty: The late payment penalty is 0.5% of the unpaid tax for each month or part of a month the tax remains unpaid, up to a maximum of 10% of the unpaid tax. This penalty begins accruing the day after the tax-filing deadline and continues until the tax is fully paid.
• Interest Charges: Interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined annually and is compounded annually. For example, the interest rate for 2023 is 4%, which is applied in the same manner as the federal rate.

Audits and assessments

Arizona may conduct residency audits to verify your residency status and ensure proper tax compliance. During an audit, you must provide extensive documentation, such as proof of domicile and detailed financial records. Failure to provide adequate documentation can result in additional tax assessments and penalties.