Do expats from North Carolina still need to pay state taxes?

As someone from North Carolina living abroad, you might wonder if you still need to pay state taxes. This article will help you understand your tax obligations.

TLDR:

Understanding North Carolina's tax residency rules

Definition of residency

Residency is about where you live, either temporarily or permanently. If you spend more than 183 days in North Carolina during a year, you can be considered a resident.

Definition of domicile

Domicile is your permanent home, the place you plan to return to after any absences. Your domicile is determined by:

• Where you physically live.
• Your intention to stay.
• Ties to North Carolina, like property ownership, voter registration, or having a driver’s license.

North Carolina’s tax residency rules

Full-Year Resident

• Criteria: You are considered a full-year resident if North Carolina is your domicile, or if you spend more than 183 days in the state.
• Tax Obligations: You must pay taxes on all your income, no matter where it is earned.

Nonresident

• Criteria: You are a nonresident if your domicile is outside North Carolina and you spend fewer than 183 days in the state.
• Tax Obligations: You only pay taxes on income that comes from North Carolina sources.

Part-Year resident

• Criteria: You are a part-year resident if you live in North Carolina for part of the year.
• Tax Obligations: You pay taxes on all income earned while living in North Carolina and on North Carolina-sourced income for the rest of the year.

Expats living full-time abroad

• Criteria: If you live abroad full-time but your last state of residency was North Carolina, you may still be considered a resident for tax purposes if you have not established a domicile in another state.
• Tax Obligations: If North Carolina remains your domicile, you are taxed on all your income, regardless of where it is earned. If you have not taken steps to change your domicile to another state, North Carolina may still consider you a resident and require you to pay state taxes on your worldwide income.

What constitutes North Carolina-sourced income?

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

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

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

This particularly benefits those with incomes exceeding the Foreign Earned Income Exclusion (FEIE) limit of $126,500 for 2024. By relocating to a state with no income tax, you can shield more of your income from taxation, thus increasing your financial freedom and investment potential.

Inheritance tax benefits

States like Florida and Texas lack a state income tax and 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 with substantial assets who wish to maximize the inheritance for their beneficiaries.

Flexibility and mobility

Relocating your domicile 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 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 and making financial management more straightforward.

How to leave North Carolina 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 North Carolina

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

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

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 significantly reduce your U.S. tax liability, especially if you live 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 North Carolina state taxes from abroad

When filing North Carolina state taxes from abroad, it's essential to determine your residency status and use the appropriate forms:

• Form D-400: This is the primary form used for filing North Carolina individual income tax returns. If you are a full-year resident, you must report all income, regardless of where it was earned.
• Form D-400 Schedule S: Use this schedule to report additions and deductions to your federal adjusted gross income (AGI) when filing your North Carolina state taxes.
• Form D-400 Schedule NR: This schedule is used by part-year residents and nonresidents to report income earned from North Carolina sources.
• Form D-400V: This is used for making payments when you owe taxes to North Carolina.

Deadlines

• Standard Deadline: April 15. The deadline for filing North Carolina state taxes aligns with the federal tax deadline. This is the due date for both filing your return and paying any taxes owed.
• Automatic Extension for Expats: June 15. If you are living outside the U.S. on April 15, you may receive an automatic two-month extension to file your return and pay any amount due without requesting an extension, extending the deadline to June 15. However, interest on any unpaid taxes will accrue from the original April 15 deadline.
• Additional Extension: October 15. You can request a further extension by filing Form D-410, Application for Extension for Filing Individual Income Tax Return, typically extending the deadline to October 15. 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 April 15 deadline.
• Payment Deadlines. Regardless of filing extensions, any taxes owed must be paid by April 15 to avoid interest and late payment penalties. If you file an extension, ensure that your payment is postmarked by the due date to avoid additional charges.

Consequences of non-compliance with North Carolina state tax laws

• Late Filing Penalty: If you file your North Carolina state taxes late, you will incur a penalty of 5% of the tax due for each month or part of a month that your return is late, up to a maximum of 25% of the unpaid tax. This penalty applies from the original due date of the return until the date it is filed.
• Late Payment Penalty: The late payment penalty is 5% of the unpaid tax. This penalty begins accruing the day after the tax-filing deadline and continues until the tax is fully paid.
• Interest Charges: Interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined annually and can vary. For example, the interest rate for 2023 was 5%, compounded annually.

Audits and assessments

North Carolina 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.