Do expats from Rhode Island still need to pay state taxes?

As an expat from Rhode Island, it's important to understand your state tax obligations. Even if you live abroad, you might still owe taxes to Rhode Island.

Knowing whether you need to pay state taxes depends on two key factors: residency and domicile.

Residency is about where you currently live, while domicile is about where your permanent home is. Your tax responsibilities in Rhode Island are determined by these factors. 

This article will help you understand how residency and domicile affect your tax obligations as an expat from Rhode Island.

TLDR:

Understanding Rhode Island's tax residency rules

Residency and domicile are critical in determining Rhode Island tax obligations. Residency refers to where you live, while domicile is your permanent home where you intend to return after any absence.

Definition of residency and domicile

Residency: Residency is where you live, either temporarily or permanently. It is based on physical presence in a particular place.

Domicile: Domicile is your permanent home, the place you intend to return to and stay indefinitely. You can only have one domicile at a time, but you can have multiple residences.

You can reside in several places, but you can only have one domicile. Domicile requires intent to remain permanently

Resident

Domicile: You are considered a resident of Rhode Island if your domicile, or permanent home, is in Rhode Island. Your domicile is where you intend to return after any absences, whether temporary or long-term.

Physical Presence: If you spend more than 183 days in Rhode Island during the tax year, you may be considered a resident for tax purposes, even if your domicile is elsewhere.

AGI and State Taxes: Rhode Island calculates state taxes based on your federal adjusted gross income (AGI). Any foreign income excluded on your federal return is also excluded from your Rhode Island return.

For expats:

Nonresident

• No Domicile in Rhode Island: You are a nonresident if your domicile is not in Rhode Island and you do not maintain significant ties to the state.
• Limited Physical Presence: If you spend fewer than 183 days in Rhode Island during the tax year, you may be considered a nonresident.

Nonresidents are only taxed on income originating from Rhode Island sources, such as wages earned in Rhode Island or income from property located in the state.

Part-Year Resident

Part-year residents live in Rhode Island for part of the year and another state for the rest. They are taxed on all income earned while residing in Rhode Island and only on Rhode Island-sourced income during the non-resident part of the year.

What constitutes Rhode Island-sourced income?

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

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

Retirees and high-income earners can greatly benefit from moving to states without state income taxes, such as Florida, Texas, and Nevada.

Without the burden of state income taxes, you can save more money, invest more, or enjoy a higher standard of living.

This is particularly beneficial for those whose income exceeds the Foreign Earned Income Exclusion (FEIE) limit, which is $126,500 for 2024. Shielding more of income from state taxes enhances your financial flexibility and investment potential.

Inheritance tax benefits

States like Florida and Texas not only lack a state income tax but also do not impose a state estate tax. This helps in reducing the overall tax burden on the estate and ensures that more wealth is passed on to beneficiaries.

Flexibility and mobility

Moving domicile to a no-income-tax state enhances flexibility and mobility, allowing individuals to travel or live in multiple locations without worrying about high state tax bills. This is ideal for high-income earners who may have business interests in different states or countries and for retirees who wish to spend their golden years exploring new places.

Without state income taxes, your tax filing process becomes simpler. You only need to file federal taxes, reducing the complexity and potential errors in your tax returns.

How to leave Rhode Island 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 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 a formal declaration to confirm your new domicile. This usually involves an affidavit stating your intention to make the new state your permanent home. Check your new state’s requirements and file the necessary documents to establish your permanent residence.

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 Rhode Island

• Sell property: If you own property in Rhode Island, consider selling it or renting it out. Ownership of property in the state can indicate ongoing ties to Rhode Island.
• Transfer IDs and registrations: Change your driver’s license and vehicle registration to your new state. This helps to demonstrate 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: Inform your employer about your change of 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: Maintain 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 Rhode Island. This includes travel records, utility bills, and any other documents that show your physical presence in your new state.

5) Be prepared for audit

If the Rhode Island Department of Revenue questions your residency status, be prepared to provide comprehensive proof that you have permanently moved out of Rhode Island.

• Proof of permanent move: Be ready to provide proof that you have permanently moved out of Rhode Island, including all documentation showing that you have established a new domicile and severed ties with Rhode Island.
• Respond to inquiries: If the Rhode Island 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 Rhode Island

Living abroad as an expat from Rhode Island 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 reduce your U.S. tax liability significantly, 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 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 Rhode Island state taxes from abroad

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

• Form RI-1040: This form is for full-year residents of Rhode Island. If you are considered a resident for tax purposes, you must report all income, regardless of where it was earned.
• Form RI-1040NR: This form is for nonresidents or part-year residents. It is used to report income earned in Rhode Island and during the period you were a resident. Nonresidents only need to report income that is sourced from Rhode Island.

Deadlines

• Standard Deadline: April 15. The deadline for filing Rhode Island 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: You can request a further extension by filing the appropriate form, such as Form RI-4868, Application for Automatic Extension of Time to File Rhode Island Individual Income Tax Return. This typically extends the deadline to October 15. However, it is important to note that this extension only applies to filing your return, not to paying any taxes owed. Interest will continue to accrue on any unpaid taxes 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 Rhode Island state tax laws

• Late Filing Penalty: If you do not file your Rhode Island personal income tax return by the due date, you will incur a late filing penalty. The penalty is 5% of the unpaid tax amount for each month (or part of a month) that your return is late, up to a maximum of 25% of the unpaid tax.
• Late Payment Penalty: In addition to the late filing penalty, if you do not pay your taxes by the due date, you will also be subject to a late payment penalty. This penalty is 0.5% of the unpaid tax amount for each month (or part of a month) that the tax remains unpaid, up to a maximum of 25% of the unpaid tax
• Interest Charges: Interest is charged on any unpaid taxes from the original due date until the taxes are paid in full. The interest rate for Rhode Island state taxes accrues at 18% per year, compounded daily. This means that the longer you delay paying your taxes, the more interest will accrue, significantly increasing the amount you owe.

Audits and assessments

Rhode Island 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.