Do expats from Pennsylvania still need to pay state taxes?
If you’ve moved out of Pennsylvania and now live in another state or country, you might wonder if you still need to pay Pennsylvania state taxes.
This article will explain your tax responsibilities as an expat from Pennsylvania.
TLDR:
- You weren’t a resident and didn’t earn Pennsylvania income.
Likely owe Pennsylvania taxes if:
- You were a resident (lived in Pennsylvania for most of the year).
- You earned income from Pennsylvania sources, even if you live elsewhere now.
Understanding Pennsylvania's tax residency rules
Pennsylvania defines residency based on domicile and physical presence. Your domicile is your permanent legal home, the place you intend to return to whenever you are away. You can only have one domicile at a time, and it does not change until you move to a new location with the intention of making it your permanent home.
Full-Year Resident
If you lived in Pennsylvania for the entire tax year, or if Pennsylvania 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 Pennsylvania, 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 Pennsylvania 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 Pennsylvania. 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 Pennsylvania and the time spent outside the state.
Non-Resident with Pennsylvania Domicile
You must report income sourced from Pennsylvania, such as wages from a Pennsylvania employer, rental income from property in the state, or business income from activities conducted in Pennsylvania.
Non-Resident without Pennsylvania Domicile
If you do not live in Pennsylvania and do not maintain Pennsylvania as your domicile, you are considered a non-resident without Pennsylvania domicile. Generally, you only need to pay Pennsylvania taxes on income sourced from Pennsylvania. This includes business operations and rental income. If you have no Pennsylvania-sourced income, you do not owe Pennsylvania taxes.
What constitutes Pennsylvania-sourced income?
Understanding what constitutes Pennsylvania-sourced income is essential for nonresidents and part-year residents to accurately determine your tax obligations.
Pennsylvania-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 Pennsylvania.
- Business Income: Income from business activities conducted in Pennsylvania.
- Real Estate: Rental income from property located in Pennsylvania.
- Capital Gains: Profits from the sale of real estate or tangible property in Pennsylvania.
- Dividends and Interest: For nonresidents, ordinary dividends and interest from Pennsylvania-based companies or financial institutions are generally not treated as Pennsylvania-sourced income unless they are connected with a trade, business, or profession carried on in Pennsylvania. Residents include dividend and interest income because Pennsylvania generally taxes the same dividend and interest income that appears on their federal return.
- Pensions and Retirement Plans: Pennsylvania generally does not tax most retirement benefits such as pensions, 401(k) and IRA distributions and Social Security once you have met the plan’s normal retirement requirements, whether you live in Pennsylvania or elsewhere. Some exceptions apply, especially for early distributions or nonqualified plans, so it is important to check current Pennsylvania guidance for your specific situation.
Tax benefits and exemptions for expats from Pennsylvania
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 portion 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 is designed to prevent double taxation by allowing you to claim 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, particularly if you live in a country with higher tax rates.
The FTC is designed to reduce the risk of being taxed twice on the same income, providing relief and making international work more manageable, although the exact result depends on your specific mix of income and foreign taxes.
Foreign Housing Exclusion (FHE)
The FHE allows you to exclude certain housing expenses from your U.S. federal taxable income. These expenses can include rent, utilities (excluding telephone), and other reasonable costs related to maintaining a household abroad.
The amount you can exclude is limited to a base amount plus housing expenses exceeding 16% of the FEIE limit.
