Do expats from Virginia still need to pay state taxes?

Moving abroad brings many changes, but understanding your tax obligations remains crucial. If you’re a Virginia resident living overseas, you might wonder if you still need to pay Virginia state taxes. 

This article will help you understand whether you need to continue paying these taxes based on your residency and domicile status. 

We’ll break down the rules and provide clear steps to ensure you stay compliant with Virginia tax laws.

TLDR:

Understanding Virginia's tax residency rules

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

Resident

Definition: You are considered a resident of Virginia if it is your permanent home (domicile). This means Virginia is the state you consider your true and permanent home, where you intend to return after any periods of absence.

Tax Implications: Residents of Virginia are taxed on their worldwide income, regardless of where the income is earned.

For Expats: If Virginia was the last state you lived in before moving abroad, and you have not established a new domicile in another state, you are still considered a Virginia resident for tax purposes. This means you must file Virginia state taxes on all your income, no matter where it is earned.

Nonresident

Definition: You are a nonresident if you do not have a permanent home or significant presence in Virginia. This applies to individuals who live in another state or country but earn income from Virginia sources.

Tax Implications: Nonresidents are only taxed on income that comes from Virginia sources, such as wages earned in Virginia, income from a business operated in Virginia, or rental income from Virginia properties.

Part-Year Resident

Definition: You are a part-year resident if you moved to or from Virginia during the tax year. This status applies to those who established residency or ceased to be residents of Virginia partway through the year.

Tax Implications: Part-year residents are taxed on all income earned while they were residents of Virginia and only on Virginia-sourced income during the periods they were nonresidents.

What constitutes Virginia-sourced income?

Understanding Virginia-sourced income is essential for nonresidents and part-year residents to accurately determine tax obligations.

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

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

State income tax savings

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

Flexibility and mobility

Relocating your domicile from Virginia 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 Virginia 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 Virginia 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, 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) Sever ties with Virginia

• Sell Property: If you own property in Virginia, consider selling it or renting it out. Owning property in Virginia can indicate a continued connection 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. 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) 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 Virginia. 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 Virginia. This includes all documentation showing that you have established a new domicile and severed ties with Virginia.
• Respond to Inquiries: If the Virginia 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 Virginia

Living abroad as an expat from Virginia 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 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

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 Virginia state taxes from abroad

Here are the key forms you might need:

• Form 760: Virginia Resident Income Tax Return. This form is for individuals who are full-year residents of Virginia. You must report all income, regardless of where it is earned.
• Form 763: Nonresident Income Tax Return. This form is for individuals who do not reside in Virginia but earn income from Virginia sources. Nonresidents only report Virginia-sourced income.
• Form 760PY: Part-Year Resident Income Tax Return. This form is for individuals who were residents of Virginia for part of the year and nonresidents for the remainder. You must report all income earned during the period you were a resident and any Virginia-sourced income earned during the nonresident period.
• Form 760C: Underpayment of Virginia Estimated Tax by Individuals, Estates, and Trusts. Use this form if you underpaid your estimated taxes throughout the year.

Deadlines and Extensions

• General Deadline: The standard deadline for filing Virginia 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 Virginia 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

Virginia 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.