Do expats from Massachusetts still need to pay state taxes?

When you move abroad, it’s crucial to understand your tax obligations. If you’re from Massachusetts, you may still owe state taxes even if you live outside the U.S. Knowing these rules helps you avoid financial surprises and stay compliant.

TLDR:

Understanding Massachusetts's tax residency rules

Full-Year Resident

If you lived in Massachusetts for the entire tax year, or if Massachusetts 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 Massachusetts, 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 Massachusetts 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 Massachusetts. 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 Massachusetts and the time spent outside the state  .

Non-Resident with Massachusetts Domicile

If Massachusetts is your domicile but you live outside the state, you must report income sourced from Massachusetts.

Maintaining a Massachusetts domicile involves factors like property ownership, state ties (driver’s license, voter registration), and personal connections (family ties, membership in local organizations). If you maintain a Massachusetts driver’s license and are still registered to vote in the state, these are strong indicators that Massachusetts remains your domicile. Consequently, you must report and pay state taxes on your worldwide income.

Non-Resident without Massachusetts Domicile

If you do not live in Massachusetts and do not maintain Massachusetts as your domicile, you are considered a non-resident without a Massachusetts domicile. Generally, you only need to pay Massachusetts taxes on income sourced from Massachusetts, such as business operations and rental income. If you have no Massachusetts-sourced income, you do not owe Massachusetts taxes.

What constitutes Massachusetts-sourced income?

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

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

Relocating from Massachusetts to a state without income taxes, such as Florida, Texas, or Nevada, can lead to significant financial benefits. Massachusetts has a state income tax, and by moving to a state with no income tax, you can retain more of your earnings. This allows you to invest more or enjoy a better lifestyle.

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, as Massachusetts has an estate tax that can significantly impact the value of the estate passed on to beneficiaries.

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 and making financial management more straightforward.

How to leave Massachusetts 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 Massachusetts

• Sell or rent out property: If you own property in Massachusetts, consider selling it or renting it out. Ownership of property in Massachusetts 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 Massachusetts. 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 Massachusetts Department of Revenue questions your residency status, be prepared to provide comprehensive proof that you have permanently moved out of Massachusetts.

• Proof of permanent move: Be ready to provide extensive documentation showing you have permanently moved out of Massachusetts. This includes all paperwork proving you have established a new domicile and severed ties with Massachusetts.
• Respond to inquiries: If the Massachusetts 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 Massachusetts

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.

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 Massachusetts state taxes from abroad

If you are a U.S. expat living abroad and need to file Massachusetts state taxes, the forms you may need include:

• Form 1: Massachusetts Resident Income Tax Return for full-year residents.
• Form 1-NR/PY: Massachusetts Nonresident/Part-Year Resident Income Tax Return for non-residents and part-year residents who have Massachusetts-sourced income.

Deadlines

• Standard Deadline: April 17, 2024. This is the standard deadline for submitting your state tax return.
• Additional Extension: If you request an extension, your filing deadline extends to October 15, 2024. Note that this is an extension to file, not an extension to pay. Any taxes owed must still be paid by the original April deadline to avoid interest and penalties.

Consequences of non-compliance with Massachusetts state tax laws

• Late Filing Penalty: If you do not file your Massachusetts state tax return by the due date (April 17) and do not have an approved extension, you will be subject to a late filing penalty. The penalty is calculated as 1% of the tax due for each month, or part of a month, that the return is late, up to a maximum of 25% of the unpaid taxю
• Late Payment Penalty: You will incur a late payment penalty if you do not pay your taxes by the due date. The 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% of the unpaid tax.
• Interest Charges: Besides penalties, interest is charged on any unpaid tax from the original due date until the tax is paid in full. The interest rate is adjusted annually and compounds daily. You can visit the Massachusetts Department of Revenue’s website for the current interest rates and more details.

Audits and assessments

Massachusetts 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.