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THE FOREIGN SERVICE JOURNAL

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JANUARY-FEBRUARY 2017

67

STATE TAX PROVISIONS

Liability:

Every employer, including the State Department

and the other foreign affairs agencies, is required to withhold

state taxes for the location where the employee either lives or

works. Employees serving overseas, however, must maintain

a state of domicile in the United States where they may be

liable for income tax; the consequent tax liability that the

employee faces will vary greatly from state to state.

Further, the many laws on taxability of Foreign Service pen-

sions and annuities also vary by state. This section briefly

covers both those situations. (See separate box on Tax With- holding When Assigned Domestically.)

Domi c i l e and Res i den c y

There are many criteria used in determining which state is a citi-

zen’s domicile. One of the strongest determinants is prolonged

physical presence, a standard that Foreign Service personnel fre-

quently cannot meet due to overseas service. In such cases, the

states will make a determination of the individual’s income-tax

status based on other factors, including where the individual has

family ties, has been filing resident tax returns, is registered to

vote, has a driver’s license, owns property, or has bank accounts

or other financial holdings.

In the case of Foreign Service employees, the domicile

might be the state from which the person joined the Service,

where his or her home leave address is or where he or she

intends to return upon separation. For purposes of this article,

the term “domicile” refers to legal residence; some states also

define it as permanent residence. “Residence” refers to physi-

cal presence in the state. Foreign Service personnel must con-

tinue to pay taxes to the state of domicile (or to the District of

Columbia) while residing outside of the state, including during

assignments abroad, unless the state of residence does not

require it.

Members are encouraged to review the Overseas Briefing

Center’s Guide to Residence and Domicile, available on AFSA’s

website at

www.afsa.org/domicile.

Domes t i c Emp l oye es i n t he D.C . A r ea

Foreign Service employees residing in the metropolitan Wash-

ington, D.C., area are generally required to pay income tax to

the District of Columbia, Maryland or Virginia, in addition to

paying tax to the state of their domicile.

Virginia requires tax returns from most temporary resi-

dents, as well. Most states allow a credit, however, so that the

taxpayer pays the higher tax rate of the two states, with each

state receiving a share.

We recommend that you maintain ties with your state of

domicile—by, for instance, continuing to also file tax returns in

that state if appropriate—so that when you leave the D.C. area

for another overseas assignment, you can demonstrate to the

District of Columbia, Virginia or Maryland your affiliation to

your home state.

Also, if possible, avoid using the D.C. or Dulles VA pouch zip

code as your return address on your federal return because, in

some cases, the D.C. and Virginia tax authorities have sought

back taxes from those who have used this address.

See box on page 66 for new procedures within the State

Department for state tax withholdings.

S t a t es Tha t Have No I n come Ta x

There are currently seven states with no state income tax:

Alaska, Florida, Nevada, South Dakota, Texas, Washington and

Wyoming. In addition, New Hampshire and Tennessee have

no tax on earned income, but do tax profits from the sale of

bonds and property.

S t a t es Tha t Do No t Ta x Non - Res i den t

Domi c i l i a r i es

There are 10 states that, under certain conditions, do not tax

income earned while the taxpayer is outside the state: Cali-

fornia, Connecticut, Idaho, Minnesota, Missouri, New Jersey,

New York, Oregon, Pennsylvania (but see entry for Pennsylva-

nia below) and West Virginia. The requirements for all except

California, Idaho and Oregon are that the individual should not

have a permanent “place of abode” in the state, should have

a permanent “place of abode” outside the state, and not be

physically present for more than 30 days during the tax year.

California allows up to 45 days in the state during a tax year.

All 10 states require the filing of non-resident returns for all

income earned from in-state sources. Foreign Service employ-

ees should also keep in mind that states could challenge the

status of overseas government housing in the future.

In “State Overviews” you will find brief state-by-state

information on tax liability, with addresses provided to get

further information or tax forms. Tax rates are provided where

possible.

As always, members are advised to double-check with their

state’s tax authorities. While AFSA makes every attempt to

provide the most up-to-date information, readers with specific

questions should consult a tax expert in the state in question.

We provide the website address for each in the state-by-state

guide, and an email address or link where available. Some

states do not offer email customer service.

We also recommend the Tax Foundation website at www.

taxfoundation.org, which also provides a table showing 2016

tax rates for all states.