Best State Domicile for Americans Moving Abroad

If you are planning to move abroad, the state you leave from matters more than most people realize. A US citizen living in Portugal who moved there from California can still be taxed by California. A US citizen living in Portugal who moved there from Texas cannot. The difference is not your behavior abroad — it is your state domicile on the day you left.

This post explains which states are best for expats, which states to escape from, and why a pre-departure domicile change is one of the highest-return tax moves you can make.

Why State Domicile Matters for Expats

The US is one of the few countries that taxes citizens on worldwide income regardless of residence. Most states piggyback on this system. If you are a resident of California, New York, or Virginia, the state taxes your worldwide income just like the federal government does — and most of those states do not recognize the Foreign Earned Income Exclusion (FEIE).

This means:

• You exclude $132,900 of salary from federal tax using the FEIE.
• California taxes that same $132,900 anyway because California does not follow the FEIE.
• Your effective tax rate on excluded federal income can be 6–13% purely from state tax.

If you establish domicile in a no-tax state before moving abroad, that state tax disappears.

The Best No-Tax States for Expats

These states impose zero personal income tax:

Texas

Texas is the default choice for many expats. No state income tax. No state capital gains tax. Large cities with international airports (Houston, Dallas, Austin). The cost of living is moderate. The residency termination process is straightforward if you actually move.

The catch: Texas is big, and if you keep a home, bank account, or voter registration in Texas after moving abroad, Texas does not tax you anyway because there is no tax. But your former state — if it was California or New York — may argue you are still domiciled there if you did not properly terminate.

Florida

Florida has no income tax, no estate tax, and a large expat population. Miami and Orlando have direct flights to most of Latin America and Europe. Like Texas, Florida is a safe harbor because there is no tax to worry about after you leave.

Nevada

Nevada has no income tax. Las Vegas is a major hub. The state is aggressively pro-business. For expats who want a quick domicile change with minimal bureaucracy, Nevada works.

Washington

Washington has no state income tax. It has a capital gains tax of 7% on long-term capital gains above $250,000 per year, but this does not apply to ordinary income, interest, dividends, or short-term gains. For most wage-earning expats, Washington is effectively tax-free.

Tennessee

Tennessee eliminated its Hall tax on interest and dividends and now has no state income tax. It is less common as an expat domicile but perfectly valid.

South Dakota, Wyoming, Alaska

All three have no income tax. They are less convenient for most Americans but work if you have ties there.

States to Avoid at All Costs

California

California is the most aggressive state for expat taxation. The Franchise Tax Board (FTB):

• Taxes residents on worldwide income.
• Does not recognize the FEIE.
• Audits former residents who claim to have left.
• Uses a broad definition of "domicile" that includes voter registration, driver's licenses, property, bank accounts, and professional licenses.

I have seen California pursue expats for state tax 10 years after they moved abroad, arguing they never really left because they kept a vacation home or maintained a California bank account.

If you are leaving California, you must surgically sever every tie. I will cover the steps in the next section.

Virginia

Virginia taxes residents on worldwide income and does not recognize the FEIE. It is less aggressive than California but still expensive. If you are domiciled in Virginia and move abroad, Virginia taxes your excluded federal income.

New York

New York uses a 183-day presence test and a domicile test. If you spend more than 183 days in New York in any year, you are a statutory resident. Even if you are abroad, if you maintain a permanent place of abode in New York and spend more than 183 days there in any year, you are taxed as a resident. New York also aggressively audits domicile changes.

Massachusetts

Massachusetts taxes residents on worldwide income and has a 5% flat tax. It is less aggressive than California or New York but still taxes excluded income. If you have Massachusetts-source income (rental property, business, investments), you remain taxable on that income even after moving abroad.

What Is Domicile?

Domicile is your permanent legal home — the place you intend to return to after any absence. You can have only one domicile at a time. Residence is where you currently live; domicile is where you belong.

For state tax purposes, domicile is what matters. If you are domiciled in California, you are a California taxpayer even if you have not set foot in the state for five years. To stop being a California taxpayer, you must change your domicile to another state or country.

States use a multi-factor test to determine domicile:

• Home and living accommodations.
• Time spent in the state.
• Location of spouse and children.
• Location of personal belongings.
• Driver's license and voter registration.
• Bank accounts and financial ties.
• Business interests and professional licenses.
• Club memberships and social ties.
• Place of burial or religious affiliation.

No single factor is determinative. California will look at the totality of circumstances.

How to Establish Domicile in a No-Tax State

Step 1: Move There Before Going Abroad

You cannot establish domicile in Texas by filling out a form from Portugal. You must physically live in Texas, establish a home, and demonstrate intent to make it your permanent home. I recommend spending at least 6–12 months in the no-tax state before moving abroad. This creates a clear paper trail.

Step 2: Buy or Lease a Home

A lease or deed in the new state is strong evidence of domicile. A PO box is weak evidence. You need a real address.

Step 3: Change Your Driver's License and Voter Registration

Get a driver's license in the new state. Register to vote there. These are the two most important objective factors in any domicile dispute.

Step 4: Register Vehicles and Insure Locally

Register your car in the new state. Get auto insurance there. Update your health insurance if possible.

Step 5: Open Bank Accounts and Update Address

Open a checking account at a local bank. Change your mailing address with the IRS, Social Security, and all financial institutions to the new state address.

Step 6: Update Professional Licenses and Affiliations

If you have professional licenses (law, medicine, real estate), transfer them to the new state if possible. Update your bar association, medical board, or other affiliations.

Step 7: Document Your Intent

Write a declaration of domicile or a letter to yourself documenting your intent to make the new state your permanent home. Keep records of your move: receipts, lease, utility bills, voter registration card, driver's license application.

How to Terminate Old State Residency

Establishing new domicile is only half the battle. You must also terminate the old one. See the companion post on how to terminate state residency for a full step-by-step guide.

In summary:

• Sell your home or rent it on a long-term lease.
• Surrender your old driver's license.
• Cancel your old voter registration.
• Close old bank accounts or convert to online-only with a new address.
• Cancel local club memberships.
• Change your address everywhere.

State-Source Income After Termination

Even after you successfully terminate residency, some income remains taxable by the old state:

• Rental income from property in the old state.
• Wages from work performed in the old state.
• Business income from operations in the old state.
• Capital gains from selling property located in the old state.

If you have significant state-source income, the old state may require you to file a nonresident return every year. The only way to eliminate this fully is to sell or relocate the income-producing asset.

The California-Specific Problem

California is so aggressive that it deserves its own warning. The FTB has a dedicated unit for nonresident and former resident audits. Common triggers:

• Filing a California nonresident return after years of resident returns.
• Selling California real estate after moving abroad.
• Receiving a large California-source distribution (stock sale, business sale) while nonresident.
• Keeping a vacation home or room available for your use in California.

The FTB will issue a notice demanding proof of domicile change. If your documentation is thin, they will assess tax, penalties, and interest for every year they believe you were still a resident.

Is It Worth Moving to a No-Tax State First?

For most high-income expats, yes. The cost of 6–12 months in Texas or Florida is far less than the state tax savings over 5–10 years abroad.

Example: You earn $150,000 per year and exclude it federally via the FEIE. If you are domiciled in California, you pay ~$9,000 per year in state tax on that excluded income. Over 10 years, that is $90,000 plus penalties and interest. Spending $15,000 to rent an apartment in Texas for a year before moving abroad is a clear win.

For lower-income expats or those with no state tax liability, the benefit is smaller. But even a few hundred dollars per year adds up over a decade.

How FileAbroad Helps

FileAbroad advises on state residency termination and domicile planning:

• State analysis: We evaluate your current state's aggressiveness and tax cost.
• Domicile documentation: We create a checklist and documentation package for your move.
• Nonresident return filing: We file nonresident state returns for state-source income after termination.
• Audit defense: We respond to state residency audits with evidence of domicile change.

For state domicile planning, start with the free intake and describe your current state, destination, and assets.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.

Official IRS sources

• U.S. citizens and resident aliens abroad
• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad