Do expats from Maine still need to pay state taxes?

Moving abroad is an exciting adventure, but it also comes with many questions, especially about taxes. For Maine residents who move to another country, understanding their state tax obligations is important. 

You might wonder if you still need to pay Maine state taxes even though you live far away. This article aims to clarify whether Maine expatriates must pay state taxes.

TLDR:

Understanding Maine's tax residency rules

Domicile is your permanent legal residence—the place you intend to return to after any absences. Your domicile determines whether you need to pay Maine state taxes on your worldwide income, regardless of where you live temporarily. If Maine is your domicile, you are considered a resident for tax purposes and must file state taxes accordingly.

Resident

You are considered a resident if Maine is your domicile or if you spend more than 183 days in Maine during the tax year.

For expats:

Nonresident

You are a nonresident if you do not maintain a domicile in Maine and do not spend more than 183 days in the state.

Nonresidents are only taxed on income that is sourced from Maine, such as wages earned while working in the state or income from property located in Maine.

Part-Year Resident

A part-year resident moves to or from Maine during the tax year. They are taxed on all income received while they were a resident and only on Maine-sourced income when they were a nonresident. This requires careful allocation of income based on the periods of residency and non-residency.

What constitutes Maine-sourced income?

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

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

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

State income tax savings

For retirees and high-income individuals from Maine, moving to states without income taxes such as Florida, Texas, or Nevada can offer significant financial advantages. Without the burden of Maine state income taxes, you can keep more of your earnings, allowing for greater investment opportunities or an enhanced lifestyle.

Inheritance tax benefits

States like Florida and Texas not only lack a state income tax but also do not impose state estate taxes. This can considerably reduce the tax burden on your estate, ensuring that more wealth is passed on to your heirs. This is especially advantageous for individuals from Maine with substantial assets who wish to maximize the inheritance for their beneficiaries.

Flexibility and mobility

Relocating your domicile from Maine to a no-income-tax state enhances your flexibility and mobility, allowing you to travel and live in various locations without worrying about high state tax bills. This is ideal for high-income earners from Maine with business interests in multiple states or countries and for retirees who desire to spend their later years exploring new places.

Moreover, 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 Maine 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 location, as it is the first and most critical step in establishing a new domicile. You can use a domicile service that can provide you with a residential address, assist with mail forwarding, and help establish your new residency.
• File a Declaration of Domicile if required:  Some states require you to file a Declaration of Domicile to confirm your new residency. This document can help solidify your intent to make the new location 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 Maine

• Sell Property: Selling or renting out any property you own in Maine can help show that you no longer have ties to the state.
• Transfer IDs and Registrations: Update your driver's license and vehicle registration to your new state to demonstrate your commitment to your new domicile.
• Register to Vote: Register to vote in your new state. Voter registration is a key indicator of your new domicile and intent to reside permanently.
• Update Personal Documents: Change your address on all identification cards, medical records, insurance policies, financial documents, and other important records.
• Close Local Bank Accounts: Transfer or close any bank accounts you have in Maine and open new ones in your new state.

3) Notify relevant parties

• Inform Your Employer: Notify your employer of your change of residency, as it can affect 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.
• Track Your Movements: Document your time spent in and out of Maine. This includes travel records, utility bills, and any other documents that show your physical presence in your new state.

5) Be prepared for audit

• Proof of Permanent Move: Be ready to provide comprehensive proof that you have permanently moved out of Maine. This includes all documentation showing that you have established a new domicile and severed ties with Maine.
• Respond to Inquiries: If the Maine Department of Taxation questions your residency status, provide thorough responses and all necessary documentation promptly to avoid potential penalties.

Tax benefits and exemptions for expats from Maine

Living abroad as an expat from Maine comes with various federal 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 Foreign Earned Income Exclusion (FEIE) allows you to exclude a significant portion of your foreign-earned income from U.S. federal income tax.

For the tax year 2023, you can exclude up to $120,000 of foreign-earned income. 

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 allows you to claim a credit for foreign taxes paid on income also subject to U.S. federal tax, helping you avoid double taxation.

This is particularly advantageous if you reside in a high-tax country.

• Credit vs. Deduction: You can choose to take the amount of any foreign taxes paid or accrued as a tax credit or as an itemized deduction on your U.S. tax return.
• Claiming the FTC: To claim the Foreign Tax Credit, you need to file Form 1116 with your tax return.

FTC Guide

Foreign Housing Exclusion (FHE)

The Foreign Housing Exclusion (FHE) allows you to deduct certain housing expenses from your taxable income.

These expenses include rent, utilities (excluding telephone), and other reasonable costs 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 Maine state taxes from abroad

Here are the key forms you might need:

• Form 1040ME: This is the Maine Individual Income Tax Return form. All residents and part-year residents must use this form to report their income.
• Schedule NR: This schedule is for nonresidents and part-year residents to report Maine-source income and calculate their tax due.
• Form 2210ME: This form is for underpayment of estimated tax by individuals.

Deadlines and Extensions

• General Deadline: The standard deadline for filing Maine state taxes is May 1st. This applies to both filing your return and paying any taxes owed.
• Automatic Extension: If you are living outside the United States on May 1st, you are granted an automatic two-month extension to file your return, making the new deadline July 1st. However, any taxes owed are still due by May 1st to avoid interest charges.
• Additional Extension: ou can request an additional extension by filing Form 760IP, which typically extends the filing deadline to November 1st. Note that this extension is for filing your return only, not for paying any taxes owed. Interest on any unpaid taxes will continue to accrue from the original May 1st deadline.

Consequences of non-compliance with Maine state tax laws

• Late Filing Penalty: If you do not file your Maine state tax return by the due date, Maine imposes a penalty for late filing. The penalty is 1% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25% of the unpaid tax.
• Late Payment Penalty: When you fail to pay the full amount of taxes owed by the due date, you will incur a late payment penalty. This penalty is 1% of the unpaid tax for each month or part of a month that the tax remains unpaid, up to a maximum of 25%.
• Interest Charges: In addition to penalties, interest is charged on any unpaid tax from the original due date until the tax is paid in full. The interest rate is determined annually and compounds daily. For example, the interest rate for 2023 was 7%, and for 2024, it is 10%.

Audits and Assessments

Maine 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.