Do expats from New Mexico still need to pay state taxes?

New Mexico residents must pay state income taxes on all their earnings, no matter where they are made. This includes reporting and paying taxes on worldwide income.

If you move abroad, it’s important to know if you still need to pay New Mexico state taxes. Misunderstanding your tax duties can lead to unexpected costs and penalties. Staying informed helps you avoid issues and remain compliant with the law.

TLDR:

Understanding New Mexico's tax residency rules

New Mexico defines residents, nonresidents, and part-year residents for tax purposes as follows:

Resident

In New Mexico, residency for tax purposes is determined by your domicile and the amount of time you spend in the state. Domicile is your permanent home, the place you intend to return to after any absences. You can only have one domicile at a time.

A New Mexico resident is someone who is domiciled in New Mexico for the entire year or who spends at least 185 days in the state during the tax year. Residents are taxed on their worldwide income, meaning all income earned both inside and outside of New Mexico must be reported on their state tax return.

For Expats:

Nonresident

A nonresident is someone who is not domiciled in New Mexico and spends fewer than 185 days in the state during the tax year. Nonresidents are only taxed on income that is sourced from New Mexico, such as wages earned while working in the state or income from property located in New Mexico.

Part-Year Resident

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

What constitutes New Mexico-sourced income?

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

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

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

State income tax savings

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

Flexibility and mobility

Relocating your domicile from New Mexico 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 New Mexico 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 New Mexico 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. 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 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 New Mexico

• Sell Property: Selling or renting out any property you own in New Mexico can help demonstrate 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. This helps 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 New Mexico and open new ones in your new state.

3) Notify relevant parties

• Inform Your Employer: Notify your employer about your change of residency. This can affect how your income is taxed and helps in establishing 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 New Mexico. 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 New Mexico. This includes all documentation showing that you have established a new domicile and severed ties with New Mexico.
• Respond to Inquiries: If the New Mexico 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 New Mexico

Living abroad as an expat from New Mexico 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 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 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 is especially beneficial if you live 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 FHE allows you to exclude certain housing expenses from your 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 New Mexico state taxes from abroad

Here are the key forms you might need:

• Form PIT-1: This is the primary form for filing your New Mexico Personal Income Tax Return. It is used by residents, part-year residents, and nonresidents to report income, deductions, credits, and calculate the tax owed.
• Form PIT-B: This form is used for the allocation and apportionment of income for part-year residents and nonresidents. It helps separate New Mexico-sourced income from income earned elsewhere.
• Form PIT-ADJ: This form is used to report adjustments to income, such as deductions and modifications specific to New Mexico tax law.
• Form PIT-CR: This form is for claiming various tax credits, including the credit for taxes paid to other states.
• Form PIT-EXT: If you need an extension to file your taxes, use this form to apply for more time to file your return.

Deadlines and Extensions

• General Deadline: The standard deadline for filing New Mexico 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 New Mexico state tax laws

• Late Filing Penalty: If you fail to file your New Mexico state tax return by the due date, you will incur a penalty. The penalty for late filing is 2% of the tax due for each month or part of a month the return is late, up to a maximum of 20% of the unpaid tax. This penalty applies even if you have an extension to file, but not an extension to pay.
• Late Payment Penalty: When you do not pay the taxes you owe by the original due date of April 15, a late payment penalty will be assessed. This penalty is 0.5% of the unpaid tax per month or part of a month, up to a maximum of 12% of the unpaid tax. This penalty continues to accrue until the taxes are paid in full.
• 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 set annually by the New Mexico Department of Revenue and compounds daily. This means that the longer you wait to pay your tax, the more interest will accrue, significantly increasing the total amount owed.

Audits and Assessments

New Mexico 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.