Do expats from Minnesota still need to pay state taxes?
When you move abroad, it’s important to understand your tax obligations. If you’re from Minnesota, you might still need to pay state taxes even if you live outside the U.S.
This article will help you understand when you need to pay taxes to Minnesota and what the rules are for expats.
TLDR:
- You lived outside Minnesota the entire year.
- You did not keep a home in Minnesota during any part of the year.
- You spent less than 183 days in Minnesota during the year.
Likely owe Minnesota taxes if:
- You were a resident (lived in Minnesota for most of the year).
- You earned income from Minnesota sources (e.g., wages from a Minnesota employer, rental income from Minnesota property, business income from activities conducted in Minnesota), even if you live elsewhere now.
Understanding Minnesota's tax residency rules
Definition of domicile
In Minnesota, your domicile is your permanent legal residence. It is the place you intend to make your home for an indefinite period. Once you establish a domicile in Minnesota, it remains until you take action to change it, such as moving to another state or country with the intention of making that your new permanent home.
Full-Year Resident
You are a full-year resident if:
- Minnesota is your permanent home.
- You spend more than 183 days in Minnesota during the tax year.
- Minnesota is the center of your financial, social, and family life.
Part-Year Resident
If you lived in Minnesota 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 Minnesota. 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 Minnesota and the time spent outside the state.
Non-Resident with Minnesota Domicile
Even if Minnesota is your domicile, you are considered a nonresident if:
- You lived outside Minnesota for the entire year.
- You did not keep a home in Minnesota during any part of the year.
- You spent less than 183 days in Minnesota during the year.
If you are a nonresident with a Minnesota domicile, you are taxed only on income sourced from Minnesota. This includes wages from a Minnesota employer, rental income from property located in Minnesota, business income from activities conducted in Minnesota, and other Minnesota-source income.
What constitutes Minnesota-sourced income?
Understanding what constitutes Minnesota-sourced income is essential for nonresidents and part-year residents to accurately determine your tax obligations.
Minnesota-sourced income is any income derived from activities or assets within the state.
Here are some key categories to consider:
- Wages and Salaries: Money earned for services performed in Minnesota.
- Business Income: Income from business activities conducted in Minnesota.
- Real Estate: Rental income from property located in Minnesota.
- Capital Gains: Profits from the sale of real estate or tangible property in Minnesota.
- Dividends and Interest: Dividends from Minnesota-based companies and interest earned from Minnesota financial institutions.
- Pensions and Retirement Plans: Retirement income from Minnesota 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
Minnesota imposes an estate tax on the transfer of the taxable estate of every decedent who was a resident of Minnesota 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 Minnesota’s estate tax can significantly impact the value of the estate passed on to the beneficiary.
Tax benefits and exemptions for expats from Minnesota
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.
