“We are planning a move out of the United States, possibly to the Philippines. Our retirement will come from pension plans in the U.S. If we receive our checks in the Philippines, we understand that we still will have to pay federal taxes. However, there is no domicile state that can collect taxes. So doesn’t that amount to a tax break? Or did I miss something?”
–Joe Doakes, United States
No, Joe, you’ve got it pretty much right there. Some states, California being one shining example, will try their darndest to collect state taxes even from those no longer living there, but if you don’t have money or property within the reach of California, there isn’t much they can do.
A lot of power that a state may have over former residents has to do with real estate, bank accounts and the administrivia of living … like a driver’s license.
If you are keeping real property in a state with income taxes (renting ut you house, let’s say), then you certainly need professional tax advice regarding that state… because, after all, you certainly have a “presence” there.
But if you are like the average Joe or Jane who is “selling up” and moving overseas, you don’t need to make any state part of your future plan. First of all, there is no law that requires an American citizen to also be a resident of any state. After all, there are literally thousands and thousands of American citizens around the world who, due to circumstances of birth are American citizens but have never even been in the USA. So you do not need a “state of residence”.
But since so many forms and business transactions and communications in general are always focused around having a US address, there’s a pretty easy solution. Become a resident of a state which has no income tax. Seven states impose no income tax. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
There are other states which don’t tax pensions and annuities, or are otherwise favorable to retirees. Kiplinger’s have quite few articles that can help you decide on a place to maintain your residence now, or in retirement. There’s more to make a state good or bad for retirement residence than their income tax alone.
It Isn't Income Tax Alone That Makes a State Favorable For Retirement
Whatever you do (and remember, all my advice is unsolicited opinion, use a competent financial adviser for all your financial matters which require one), do not be like the folks in my “Car Broke Down Here” story, where they stay in a situation they really don’t like just because … well … they are there.
It’s your life, make it happen the way you want it to. I don’t know of anything that has made me sadder over the past 10 or 12 years of becoming (slightly) expert regarding moving to and living in the Philippines, than the people who “can’t stand” their current situations, but refuse to take action to change them.
Be the exception that proves the rule and make yourself happy, you are entitled to, tax laws or no tax laws.
Dave:
Before I relocated to Abu Dhabi from California, the first thing I did was to change residency to Florida before leaving the US, given California’s predilection for trying to collect tax on you, even after leaving the state (aside from what they are owed). They have even been known to go so far as to claim that a business trip to a branch office of your company exposes you to tax liability (They tried this on me after I relocated overseas).
Florida has another bonus in addition to zero tax: There are so many snow birds there that it is one of the very few states that allows a dual driver’s license to temporary residents. I used my mother’s address there as a mailing address and they issued it, allowing me to keep my other licenses. Though a Philippine DL is valid everywhere, I ran into some problems with car rentals for business trips. The FL license makes it much easier to deal with that stuff.
@John Miele (ID 4209): California has been known to attempt to follow residents even into th grave, looking for their cut.
Florida is indeed one of the best for ‘residence’, as they make it very easy to establish residency. I didn’t know about the dual driver’s license deal, that’s a good one.
Interesting question I had not thought about. You just to do not automatically become a resident of a state. It requires residing there for a year or something like that. If you have a bank account in the United States and earn interest seems that’s income. I will make a point to ask my Filipino tax man this year, bet he knows. On a second note unfortunately life does not always deal us a winning hand. The world is not always our Burger-King and we can not always have it our way. Some have been more fortunate than others.
@zeke_axlerod (ID 4213): Hi Zeke. There are fifty US states and thus 50 different sets of laws as far establishing residency, but I can assure you that you can become a legal resident of a state like South Dakota in much less than a year … in fact, typically an hour, there’s even a state office set up to facilitate residency changers. (If you aren’t needing a new driver’s license from South Dakota, you can get the whole job done by mail, through a mailing service which will give you a legal mailing address in the state, you don’t even need to physically visit. If you want a new license, you have to visit a motor vehicle office there, thanks to the American Patriot Act)
Florida also has special provisions for residency changers, their state tourism folks even publish a book on the the subject. It’s certainly 100% feasible to change your state of residency before moving to the Philippines in order to avoid paying taxes to a state you aren’t residing in for the rest of your life.
Now, I’m not sure abut the comment on interest. Certainly if you have money earning interest in a bank, that’s income for all intents and purposes. I don’t see much of a question here.
But why have that money in an account in a state that charges you income tax on it? That’s my point. Not only the 7 states I listed have no income tax, a number of others exempt interest, dividends and age-based pensions, so chose one that doesn’t penalize you.
Colorado, for example, where I lived before I moved to the Philippines, does have an income tax, but my pensions are specifically exempted, and none of my other income is from Colorado, so I have just stayed a resident there as a mater of convenience and voter registration. However, the day I have to pay Colorado income tax is the day I pick another state. Or leave them all. One advantage to living overseas is, you never have to be subject to the dictates of one of the states. Federal law? Yes. State law, not so much. It may not be Burger King, but it’s close.
Mmmmm.. well I guess it depends on each persons tax situtation ? and if that person ever plans on returning to that state. When I consider the benifits I have received from the State of California vice the small amount I have payed in income taxes the taxes were money well spent. Don’t think I would be in a rush to give up my California State residency.
@zeke: Well you can feel free to pay taxes to live in a state while not living in that state as long as you wish to, Zeke. As you point out, I was merely trying to alert people to the idea that they do not have to pay state taxes when they aren’t living in a state … I’ve repeated written articles along similar lines in the past and it’s apparent to me it is something many haven’t thought of before .. and thoughtful consideration is all I’m trying to provoke. Be well.
Dave,
You mentioned you do not need a “state of residence” in the US. My question is what address do you use when filing your US fedrl income tax? I now live in Nevada but I have no friends/reletives I can use for my mail and I was thinking of a Mail forwarding service in Florida that you have recommended a few months ago. When I file my yearly Income tax, would I use that Florida address or can I use my new RP address?
Any other advise on how to handle this required yearly filing. How do most of the other expats do this with no relatives or friends to take care of your mail when they file every year?
@Denny Carroll: Hi Denny, thanks for writing in and for your question. Funny how the comments will flow whenever I write about taxes … I’d write about them every day if they didn’t bore me so damn much.
If you live in Nevada, you might like to remain a Nevada resident after to move … there are plenty of re-mailing services there in Nevada … in fact it’s a big business, since Nevada is a very easy state to take up residence in or to host an LLC in. Just Google or check the Yellow pages, I know there’s dozens and dozens. When I had my “brick and mortar” business in Colorado, I formed my corporation in about five minutes flat in Nevada, re-mailing was one of the many services the company offered. Think carefully what mail you are going to need. I’ve written about that several times before. There’s almost nothing you are getting in your mailbox today that you really need in the Philippines. Certainly not IRS forms, in fact the IRS would far prefer you eFile. They don’t 9as yet) pay you to do so, but they do direct deposit your refund to your bank in about 5 days as a ‘reward’ for eFiling.
Use whatever address on your taxes you prefer and is legal with the IRS. Mita and I always file our taxes online, I like “TaxAct” as it’s a bit cheaper and more streamlined, she prefers “TurboTax”, so we use “TurboTax” (I’m no dummy). Depending on the software you use and your tax situation, it can be free.
But again, there are hundreds of thousands of US citizens overseas who never even _had_ a US address. There are separate IRS address to send tax returns to when usung an outside the US address, you will not be unique.
Good information about the States, Dave. I’m from Illinois and have no property or anything else there, so this tax year, my first full year in the Philippines, I see no need to file any more tax forms with the great, politically corrupt State of Illinois. I used my address in the Philippines last year, and the IRS sent my refund via Direct Deposit to my account in the States.
@Dave DeWall (ID 4269): yep, there’s really no need for a stateside address, ever … unless someone has property or a business or something else like that back in the USA … and no need for physical mail, either.
hi, I have a friend who’s asking help! she’s a a filipina, 39 years married to her husband a danish national. He died of cancer in dec.28.2010, and she’s the sole beneficiary, do you think Phil. Internal Revenue gonna tax her pension from the danish pension plan? she’s a resident of Paranaque since the 80′s and her husband an expat till the last 3 years when he’s approved of residency. Her house is under her name except the car… and they don’t have any business at all..pls let me know your insights… thanks…
Letty
@letty (ID 5168): Hi Letty, thanks for being a reader and for contributing to the community here. Will the Philippine BIR tax here on her pension from Denmark? Gosh, I have no idea. Sorry, I don’t know much about those issues. I suspect you’ll find an answer here: http://www.bir.gov.ph/. Godspeed.
IN REGARDS TO THE FOLLOWING CONVERSTIONS ABOVE WOULD ALL THIS WORK THE SAME? I WORK OFF SHORE IN LOUISIANA BUT HAVE BEN TRAVELING BACK AND FOR ONLY FOR WORK. AND I AM NOW CONSIDERING GETTING A ONE YEAR TEMPERAY RESIDENCY IN THE P.I WITH LIVE IN GIRLFRIEND FROM THERE . MY CONSERN IS STATE TAXES AS WELL. I DO THOUGH HAVE A HOUSE IN LOUISIANA THAT IS BON FORDEADED TO MY UNCLE BUT TENICLY IS STILL IN MY NAME TILL HE CAN GET LOAN IN HIS NAME BUT WILL NEVER HAPPEN DO TO HIS CREDIT. IF IM A EXPAT CONSIDERED TAX PEPOSE THEIR UNDER ONE YEAR RESIDENCY DO I STILL HAVE TO PAY STATE TAXES HERE WERE I WORK? OR SHOULD I STILL GO ABOUT GOING TO FL FRIST. AND FROM FL HOW LONG BEFOR FILLING FOR ONE YEAR TEMPARY RESIDENCY IN P.I WHILE STILL WORKING OFFSHORE IN LOUISIANA?? SECOND ? IN STEAD OF GETTING DULE DRIVERS L CAN I JUST GET A INTERNATIONAL DRIVERS L ?
@ Billy
Wow a lot of questions all rolled into one paragraph here. let’s break things down and try to give you some answers:b (by the way you could do us all a big favor and write in normal upper and lower case. It’s very hard to read when it’s all caps.)
I don’t believe working on off shore oil rigs qualifies for any tax breaks. You need to do your own research into Louisiana’s tax laws .. I can’t learn the tax laws in all 50 states.
I’m not really sure how to answer this. Where would your income be coming from? re you talking about still working in the US (off shore waters) but living in the Philippines? In order to shelter any income you have to be in a foreign country for at least 300 days out of each year. Seems to me that wouldn’t leave you much time for working to earn. I don’t understand, perhaps you could explain a little better.
Sorry I don’t know what sort of visa you are tlkaing about. I don’t know of any one year visa to the Philippines thta US residents can get, so I have no idea how long it would take.
I have no idea what a DULE driver’s license is, but in the Philippines you can drive on any valid US driver’s license for up to 90 days, and then you can get a Philippine driver’s license based upon your US license.
There is actually no such thing as an International Driver’s License. You are probably talking about an International Driver Permit which requires a valid home country license to make it valid. No need for one of those in the Philippines. You must have either a US license or a Philippine license to drive in the Philippines. I recommend you take driving very slowly here. It’s quite expensive to have a car and the average American has No Idea what driving here is really like. Public transpo is everywhere, and cheap … there’s alot of things you need to get arranged for yourself before you get into driving, that’s for sure.
Hope this helps a little, Godspeed.