Here's how the situation played out for my client for 2005, 2006 and
2007. While I know he will have to continue filing federal returns, I'm trying to figure out if he will need to continue filing state returns as I don't think he has a "tax home" in the USA anymore.
In 2005, he lived in Maryland for much of the year, paid Maryland and Federal taxes but moved to Europe in the early fall and claimed a partial foreign income exclusion for the time he lived in Europe (he passed the 330-day test because he continue to live in Europe for all of 2006).
In 2006, he lived in Europe all year long, his wife and children joined him at the end of the summer. He rented out his home that he left behind at the end of the year and paid Maryland taxes just like the year before. He filed a federal return but the foreign income exclusion, standard deduction and exemptions zeroed out his federal taxable income (Maryland taxes were considerably less than the year before but he still owed a few hundred dollars).
In 2007, all of the family lived in Europe all year but he he continued to rent out his home in Maryland for most of the year while also putting it up for sale. The property sold in August and he had no more rental income in Maryland after that. He filed both Federal and Maryland returns but he had zero taxable income for both.
He is well aware that he will still be filing Federal tax returns like normal and claiming the foreign income exclusion. Unless his job gives him a huge raise, his federal taxable income will probably be zero for the foreseeable future.
Now he no longer has any real estate in Maryland, and the only asset he has in Maryland, or the entire United States for that matter, is a bank account.
Does this mean his tax home is still Maryland?
Does he still need to keep filing a Maryland return?
So if a random foreign person buys property in Maryland, do they owe Maryland income taxes? I know that the owe Maryland taxes on the capital gain when they sell their property, but it seems strange that there should be an income tax. What about other states, like California?
The issue is: when does a resident of a state stop being a resident or domiciliary and is therefore no longer subject to state income taxes except for income sourced in that state?
I would have typed "If" instead of "While". Maryland property includes bank accounts, investments which, in addition to property include CD's and IRA's held in Maryland banks as well as Maryland brokerage accounts, and the list gets longer. Make certain that he is receiving no 1099's at a Maryland address.
When I leave Maryland, I will make it clear that I have no intention of returning.
Because when you took at his federal taxable income from line 37 of the 1040, which was a considerably reduced number from wages shown on Line 7, mainly due to the Foreign Income Exclusion, losses on the rental property (you can show negative rental income so long as less than $25,000 AND total other income is under $125,000) and student loan interest, THEN subtracted the Maryland standard deduction AND the Maryland Exemption amount, taxable net income in Maryland came to zero.
I also inquired with the state of Maryland and they said I did NOT need to add back the Foreign Income Exclusion (because they recognize it) and I did not need to add back the losses on rental property either.
He surrendered his Maryland drivers' license in order to get a drivers' license in Europe without taking any road test.
He probably is still listed on the voter rolls in Maryland but hasn't voted in any elections there since 2004. Perhaps he needs to contact the county board of elections to get off their rolls?
He has nothing stored in Maryland and while he does have a bank account with a bank located in Maryland, his bank statements go to his European address.
I had a client who lived in Alabama - a state with income tax - who left to live in Hong Kong for an indeterminate period that ended up being about four years. Alabama took the position that he remained an Alabama resident with state income tax filing required until he returned to the U.S. and established residency in another U.S. state. The client established a tax home in Texas before leaving the country.
I believe this is the position many states take with respect to servicemen and -women as well.
FYI: Members of the military are covered by federal law (Servicemembers Civil Relief Act).
Basically, the law says you remain a resident of the state from which you entered the military. You don't lose your residence or domicile when you are stationed out of state under military orders. Nor, can a state in which you are stationed under military orders treat you as being domiciled or resident in that state unless you actually change domicile. In addition, any military compensation is not treated as sourced inside the state where earned if you are under military orders and not domiciled in that state.
Each State of the Union plus the D.C. is free to enact laws as to how it will tax its own service personnel. E.g., a state can agree not to tax its residents who enter the military and move out of state under orders that are a permanent change of station (PCS). CA does this. The state can choose to tax all its residents even there is a PCS.
When a member of the military relocates out of country, the rules are still the same relative to remaining a resident of the state from which you entered the military or the state in which you changed your domicile. Therefore, if one is from a state that taxes military pay even if under a PCS, the member of the military may want to think about changing one's domicile to a state that has no personal income tax on compensation. This would have to happen before departing the U.S.A. as it is extremely difficult to change domiciles or convince a state you changed domiciles when you are stationed out of country.
I'm sorry I let this thread lie for a few days because I was busy with other things.
Caj, your client may or may not remain a Maryland resident during his absence, depending on facts that you haven't provided here.
First, disabuse yourself of the notion that there is some connection between "tax home" and the concept of residence for state income tax purposes. They are not the same thing at all. No doubt your client has established a new tax home in the foreign country, but that has nothing to do with his state income tax residency status.
Maryland law defines a resident to include all domiciliaries, and makes no provision for a domiciliary to be a nonresident under any circumstances. See Maryland Administrative Release No 37
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for theComptroller's explanation of domicile. In general, a change of domicile requires all of three elements: abandonment of the previous domicile, moving to and residing in a new location, and an intent to remain in the new location permanently or for an indefinite period of time. Until all three elements are met, the individual's domicile remains where it was. Thus even if your client has severed all of his ties to Maryland, he remains a Maryland resident for tax purposes unless he has moved to another place with the intention of remaining there permanently.
States generally presume, in the absence of strong evidence to the contrary, that a US citizen who goes to a foreign country does not intend to remain there permanently, but expects to return to the US eventually. Of course there are circumstances where an individual really intends to live in the foreign country indefinitely, and not to return to the US; but the burden is on the individual to show that he or she has actually established a new domicile in the foreign country.
There are Maryland Court of Appeal decisions going both ways on this issue. In Comptroller v. Mollard, 53 Md App 631 455 A2d 72,
02/04/1983, an ITT employee accepted an executive position in Belgium. He moved his family to Belgium, they sold their home and severed virtually all of their ties with Maryland, and they participated in the community in Belgium in a manner that suggested an intention to be there indefinitely. When they left Maryland they had no intention of ever returning there to live, although they did expect to be reassigned by ITT and to return to the US eventually. The initial duration of the executive's Belgian visa was two years, and it would have had to be renewed every two years if he had stayed in Belgium. As it turned out, he was reassigned by ITT and returned to the US after 20 months in Belgium. The Maryland Tax Court held that he had established a new domicile in Belgium, but the Court of Special Appeals found that the taxpayer had a definite intention to return to the US at some point. Therefore he could not be held to have established his "true, fixed home and permanent establishment" in Belgium.
A more favorable decision is in Comptroller v. Robert E. Haskin, et al., 298 Md 681 472 A2d 70, 03/12/1984. That case involved three different taxpayers, each of whom had been determined to have retained his Maryland domicile during his foreign assignment by the lower court. Two of the taxpayers had gone to Iran, and the third to Holland, all on civilian employment assignments. All of them had left more ties in Maryland than the taxpayer in Mollard; all of them kept their Maryland homes and rented them during their absence. Each established ties in the foreign country consistent with an intention to remain there for a long time; and none of them had expressed a specific intention to return to the US to live. That seems to be what turned the tide in these cases, which are otherwise difficult to distinguish from Mollard. The Court of Appeals held that all three had established new domiciles in the foreign countries, even though they returned to the US within a relatively short period of time due to unexpected circumstances (in the Iranian cases, the revolution). So they were nonresidents during their absence.
I'd suggest you read both of these cases carefully and consider how your client's facts compare with them. Depending on your client's situation and his intentions, he may or may not still be a tax resident of Maryland.
In the Haskin case the court specifically noted that at least one of the taxpayers had not voted during his absence. I believe that US citizens are entitled to retain their voter registration, and that retaining registration where they lived before moving to a foreign country has nothing to do with their domicile. However, the Maryland court seemed to make an issue of it.
As you can see, there is no clear yes or no answer here.
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