Tax Fact: U.S. Citizen – IRS Tax Returns Forever, State Returns Maybe
Many people know the U.S. taxes on worldwide income, however, if you are a U.S. citizen this is true regardless of where you live. All U.S. citizens must file a tax return every year reporting worldwide income. For example, if a U.S. citizen moves to Switzerland and lives there for 10 years without ever visiting the U.S., a federal tax return would still be required to report worldwide income. There are some exemptions to income that may apply in this situation, or possible foreign tax credits, but the tax return would still have to be filed to claim the exemptions or credits. The only way to avoid these filing requirements is to renounce your U.S. citizenship, which is a decision not to be made lightly because it comes with many tax consequences as well as immigration issues. It is not as simple as renouncing for one year and coming back to the U.S. the next.
From a state perspective this is not the same rule. Generally, the rules about state taxation revolve around a concept called “nexus” – how many ties you have to the state including income earned, investments, or actually living in the state. A common issue right now is California believing certain taxpayers have sufficient nexus to require a California tax return, even if the taxpayer is living abroad, in another state, and does not have any ties to California. What can cause this situation is owning a vacation home in California, holding a business license in California, or any other situation where California may believe you are living in or earning income in the state. If California believes a tax return is due, it will estimate a tax return for the taxpayer and then require payment by issuing invoices or other notices. Unfortunately, the California tax notices can get mailed to a former address where the taxpayer no longer lives. These notices may warn of liens, levies, or other actions and when they are not addressed California can take action. Under these circumstances taxpayers have had bank accounts levied in Illinois, Texas, or even had liens placed on their credit while living in Europe. However, if the matter is properly handled when discovered, and it is proven to California the return was not required, the levies can be refunded and liens removed.
At Hone Maxwell LLP we can help you with either situation. For federal returns we can review what possible exemptions are available if you are living abroad or if you qualify for any foreign tax credits. We also have helped taxpayers prove they do not have to file a California tax return. This can be necessary to refund bank levies or remove liens. If you any issues or questions regarding your filing requirements, or proving you filed correctly, contact us at Hone Maxwell LLP to discuss your options. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.