Do expats from Montana still need to pay state taxes?

For Montana residents living abroad, understanding state tax obligations is essential to avoid unexpected financial burdens and ensure compliance.

Even if you've moved out of state, you might still need to pay Montana state taxes based on your residency status and domicile.

This article will explain Montana's tax rules for expats, including residency statuses, the impact of domicile on taxes, and what constitutes Montana-sourced income.

We'll also provide steps for changing your residency, discuss tax benefits for expats, outline the process for filing state taxes from abroad, and highlight penalties for non-compliance. 

TLDR:

Understanding Montana's tax residency rules

Resident

A resident of Montana is someone who considers Montana their permanent home (domicile). As a resident, you are taxed on your worldwide income, no matter where it is earned. This means if you maintain significant ties to Montana, such as owning property, having a Montana driver's license, or being registered to vote there, you will likely be considered a resident for tax purposes.

Nonresident

A nonresident is someone who does not have a permanent home in Montana. Nonresidents are only taxed on income earned from Montana sources. This includes money from working in Montana or income from property located in the state.

Part-Year Resident

Part-year residents are individuals who lived in Montana for part of the year and then moved out, or vice versa. You will be taxed on all income earned while you were a resident and only on Montana-sourced income during the time you were not a resident.

Americans abroad with Montana domicile

If you are an American living abroad but Montana was your last state of residency and still consider it your domicile, you will be subject to Montana state taxes.

To change this status, you must establish a new domicile in another state, which involves severing all significant ties with Montana, such as selling property, transferring your driver’s license, and registering to vote elsewhere.

What constitutes Montana-sourced income?

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

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

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

State income tax savings

For retirees and high-income individuals from Montana, moving to states without income taxes such as Florida, Texas, or Nevada can offer significant financial advantages. Without the burden of Montana 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 Montana with substantial assets who wish to maximize the inheritance for their beneficiaries.

Flexibility and mobility

Relocating your domicile from Montana 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 Montana 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 Montana tax residency?

Here are the key steps to help you transition:

1) Establish new residency

• Secure a Residential Address: Secure a residential address in your new location. This 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, like Florida, require a formal declaration to confirm your new domicile.

Reference guides may provide additional help for specific states:

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

2) Transfer IDs and registrations 

Update your driver’s license and vehicle registration to reflect your new address. This demonstrates your commitment to your new domicile.

3) Register to vote 

Sign up to vote in your new state. Voter registration is a key indicator of where you consider your permanent home.

4) Update documents

Ensure all personal documents, such as identification cards, medical records, insurance policies, and financial documents, reflect your new address. 

5) Notify your employer

Inform your employer about your residency change, especially if it affects how your income is taxed. This can help shift some of your income classification away from being Montana-sourced.

6) Notify IRS 

Inform the IRS of your address change using Form 8822. Extend this notification to all personal and professional entities.

7) Keep records

Maintain thorough records of all your relocation actions, including receipts, bills, and legal documents. These records are invaluable if your residency status is questioned.

8) Cut all ties with Montana

• Sell or rent out property: If you own property in Montana, selling or renting it out can help sever ties with the state.
• Close local bank accounts: Transfer or close bank accounts in Montana and open new ones in your new state of residence.
• Cancel local memberships: Cancel memberships in Montana-based clubs, organizations, and services.

9) Be prepared for audit

Be prepared to provide proof of your move’s permanence. Documentation showing that you have established a new domicile and severed ties with Montana is essential in the event of an audit.

Tax benefits and exemptions for expats from Montana

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

Here are some of the key federal 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.

This benefit helps reduce the taxable income for expats, making it a significant advantage.

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 credit for foreign taxes paid on income subject to U.S. federal tax.

This credit can significantly reduce your U.S. tax liability, 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 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 Montana state taxes from abroad

Here are the key forms you might need:

• Form 2: Montana Individual Income Tax Return, used by full-year residents and part-year residents.
• Form 2EZ: A simplified version for individuals with straightforward tax situations.
• Form 2EC: For claiming the Elderly Homeowner/Renter Credit.

Deadlines and Extensions

• General Deadline: April 15, aligning with the federal tax deadline.
• Automatic Extension: Expats may receive an automatic two-month extension to file, extending the deadline to June 15.
• Additional Extension: You can request a further extension to October 15, but this only extends the filing deadline, not the payment deadline. Interest on unpaid taxes will accrue from April 15.

Consequences of non-compliance with Montana state tax laws

• Late Filing Penalty: 5% of the unpaid tax per month, up to a maximum of 25%.
• Late Payment Penalty: 0.5% of the unpaid tax per month, up to a maximum of 25%.
• Interest Charges: Interest is charged on any unpaid tax from the original due date until the tax is paid in full, compounded daily.

Audits and Assessments

Montana 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.