Do expats from Connecticut still need to pay state taxes?
If you’ve moved out of Connecticut and live elsewhere, you might wonder if you still owe Connecticut state taxes. This article will explain your tax duties as an expat.
TLDR:
- You weren’t a resident (and didn’t earn Connecticut income)
AND
- You don’t consider Connecticut your permanent home (domicile).
You likely owe Connecticut taxes if:
- You were a resident (lived in Connecticut for most of the year)
OR
- You earned income from Connecticut sources (even as a non-resident).
Understanding Connecticut's tax residency rules
Connecticut defines residency based on domicile and physical presence. Your domicile is your permanent legal home, the place you intend to return to whenever you are away. You can only have one domicile at a time, and it does not change until you move to a new location with the intention of making it your permanent home.
Full-Year Resident
If you lived in Connecticut for the entire tax year, or if Connecticut was your domicile and you spent more than 183 days in the state, you are considered a full-year resident. As a full-year resident, you must report all income to Connecticut, regardless of where it was earned. This includes wages, business income, capital gains, interest, dividends, rental income, and more.
Part-Year Resident
If you lived in Connecticut for part of the year and then moved out, you are a part-year resident. You need to report all income earned while you were a resident of Connecticut. For income earned after moving, it should be reported to the new state of residence, if applicable. Filing as a part-year resident involves prorating your income based on the time spent in Connecticut and the time spent outside the state.
Non-Resident with Connecticut Domicile
Even if you live outside Connecticut, if Connecticut remains your domicile, you are considered a non-resident with Connecticut domicile. In this case, you only need to report income sourced from Connecticut, such as wages from a Connecticut employer, rental income from property in Connecticut, or business income from activities in the state.
Non-Resident without Connecticut Domicile
If you do not live in Connecticut and do not maintain Connecticut as your domicile, you are considered a non-resident without Connecticut domicile. Generally, you only need to pay Connecticut taxes on income sourced from the state, such as income from a business operating in Connecticut or rental income from property in the state. However, you do not owe Connecticut taxes if you have no Connecticut-sourced income.
What constitutes Connecticut-sourced income?
Understanding what constitutes Connecticut-sourced income is essential for nonresidents and part-year residents to accurately determine your tax obligations.
Connecticut-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 Connecticut.
- Business Income: Income from business activities conducted in Connecticut.
- Real Estate: Rental income from property located in Connecticut.
- Capital Gains: Profits from the sale of real estate or tangible property in Connecticut.
- Dividends and Interest: Dividends are from Connecticut-based companies, and interest is earned from Connecticut financial institutions.
- Pensions and Retirement Plans: Retirement income from Connecticut institutions or for services performed in the state.
Why should you move domicile to a state with zero state income tax?
Avoidance of estate tax
Connecticut imposes an estate tax on the transfer of the taxable estate of every decedent who was a resident of Connecticut at the time of death. Moving your domicile to a state without an estate tax, such as Florida or Texas, can significantly reduce the tax burden on your estate, ensuring more wealth is transferred to your heirs. This is particularly beneficial for individuals with substantial assets, as Connecticut’s estate tax can significantly impact the value of the estate passed on to beneficiary.
Tax benefits and exemptions for expats from Connecticut
Living abroad as an expat comes 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.
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.
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.