Have a Tax Question? Ask a Tax Expert
Thank you for your question, and your service to support our soldier's families overseas.
The issue is that the states at large, do not allow the overseas exclusion as the Federal does. ALSO, the states, with but two or three exceptions, do not recognize double tax treaties held by the U.S. with foreign countries.
With North Carolina and a couple of others (noteably California and Virginia), unless you cut all ties with them, they consider persons traveling to overseas to work, as being temporarily gone. That sometime you will be returning. IN order to avoid NC taxes, you have to cut ALL ties.
NC assesses income taxes on the World Wide Income of its residents, and residnecy is not determined solely on the ownership of property. In North Carolina, you are considered a resident, even if you sell your home, IF you have not made another state your residence. Any assignment overseas is considered temporary, and the assumption is you will be returning.
So even though you sold your home, you did not make another state your residence. To do this, you have to send a strong signal such as all of the following: (a) close all bank accounts in NC and move them to another state; (b) sell property (which you did), but also getting a lease or buying a home in the new state; (c) registering your vehicle in another state, (d) getting another states driver's license, (e) registering to vote in another state.
For what ever reason, you made NC your home of record for the DODD's, and You continued to vote in NC. This is sufficient for NC to consider that you are still NC residents and there for accountable to them for taxes.
North Carolina, however will give you credit for taxes paid to another state or country.
Ed, thank you for your answer. I went out for the evening, and it is now past 11:15 pm here in Okinawa. I have more questions, but will probably not be able to check for your reply until my morning, in seven hours.
So, comparing my research to your answer, the IRS considers a PCS move (permanent change of station), with an indefinite return date to mean that my domicile is now the foreign country where I reside for over 330 days a year (even though I must continue to pay federal income taxes), and some states exempt state taxes on this basis; but North Carolina does not. My official return date is August, 2010, just for ID card renewal purposes. Dept. of Defense Dependents Schools teachers are the only employees in federal service who do not have a term limit and can remain employed indefinitely at their location, barring another change in duty station due to base closures, resignation, retirement, or voluntary transfers. I have never been advised by my payroll authority that I should be paying state taxes, so I haven't done so in almost 10 years.
What claim does NC have on previous years of not paying taxes there? Also, please read the following items I found, one from "Just Ask," which is why I sent in my question:
Is there anything definitive in the NC statutes that spells out their position on military or civilian PCS moves that negates the federal government's definition of "domicile?" Thanks for your continuing help.
1. Your interpretation of my answer in regards XXXXX XXXXX is correct. As stated, NC and other states, while they base the return on the federal return, they do not follow or recognize all the IRS rules regarding foreign income exclusions. Even if they did, in order to take advantage of any exclusions, you have to file the return. If you do not file the return, after the statute of limitations, in those states that would allow it, you would loose the benefit. (based on the statute of limitations for refunds of three years).
2. Regarding the link ending in overseas-work: This is a posting made by perhaps the best tax expert in this site. He is talking about federal benefits and service in combat zones. There was a bill pending in congress to extend the same tax benefits of federal employees in combat zones as available to military members. But, that "tax parity" bill was never passed, and is currently marked dead in the congressional record. He is stating that the civilian employees are entitled to the foreign income exclusion on the federal taxes. However he does not address the issue of state taxes, that I could see. There is no question here that you should be able to enjoy the foreign income exclusion on your federal return. your issue is for state taxes.
3. liNK FOR O-CONUS: This article addresses state taxes in general, but is focused on the federal regulations. IT is posted by a tax firm name Atlas Tax Associates. General articles like this that pertain to the states, overlook the fact that all 50 states and Puerto Rico have slightly different variations of what domicile means. AND while most state taxes, including NC, are based on your Federal Return; being based on the Federal Return does not mean that the state is conforming 100% to federal laws, it means the states require entries on the state return found on the federal return. So you have to figure the federal return first, then do the state return. Many states conform to federal regulations on the issue of domicile, but many do not.
4. for link related to voting: They are speaking about the very act of voting, not the other conditions that might work together to determine your residency for tax purposes. I mentioned in my answer, that where you voted was among the conditions that can be used by NC to determine your state of residency, not independently. One single factor alone does not work. It will up front. In all states, they determine residency for tax purposes based on a long list of issues not related to just one or two items. So taken alone, voting in NC in a federal election does not in itself determine residency, or an intention to return. BUT, if they see that you were a resident, say last year, and you have not changed your residency, then NC will say: look, yes they sold the home, BUT, they still have a NC drivers license, they have not changed states, and they vote here. Even if the voting is in the federal elections, taken together in the full picture of things, they would consider you a resident, and it would be up to you to defend against that. If on the other hand, you do not have any NC bank accounts, driver's licenses, or vehicle registrations, AND you do not list NC as your home of record on the DOD regs, the act of voting in NC in a national election would not figure in at all.
5. Determining Domiciliary in NC. No one factor stands alone but for few exceptions. In administering the determination, the Department of revenue looks at primary factors, secondary factors, and other factors. Primary factors are things that could, based on that one or two things alone determine that for tax purposes your residency is NC, even if physically domiciled else where, such as overseas. Owning property is an example of a primary factor. A secondary factor would be things that when two or more exist, it can signal, together with other factors that you should be treated as a resident for tax purpose. Other factors includes things that only serve to substantiate the condition of intention, and have no other bearing. These would be for example, voting in national elections in NC when you have been a resident there.
A critical component of NC law is that you have to prove you are not a resident, if any of those factors are present. This also includes pertinent negatives, as you will see when I post the law. A pertinent negative in your case is that you did not buy property in another state, nor did you establish definitively, another residence in another state.
You can see it is not simply a matter of saying, hey, i have lived overseas for the past 10 years, and there for I no longer have a domicile in NC. Not that easy, especially if you (1) have any connection at all to NC, (2) you signal in some way an intention to eventually return, or (3) you have not established a residence in another state.
I am providing a copy of the law, and I am underlining and highlighting those elements that appear to affect you. Understand that you have not shared with me about if you have a driver's license for NC, a car still registered there, or bank accounts in NC.
17 NCAC 06B .3901 DEFINITION OF RESIDENT(a) Only One Domicile. -- Domicile means the place where an individual has a true, fixed permanent home and principal establishment, and to which place, whenever absent, the individual has the intention of returning. In many cases, a determination must be made as to when or whether a domicile has been abandoned. A long standing principle in tax administration, repeatedly upheld by the courts, is that an individual can have but one domicile; and, once established, it is not legally abandoned until a new one is established. A taxpayer may have several places of abode in a year, but at no time can an individual have more than one domicile. A mere intent or desire to make a change in domicile is not enough; voluntary and positive action must be taken.(b) Factors. -- Some of the tests or factors to be considered in determining the legal residence of an individual for income tax purposes are as follows:(1) Place of birth of the taxpayer, the taxpayer's spouse, and the taxpayer's children.(2) Permanent residence of the taxpayer's parents.(3) Family connections and close friends.(4) Address used for federal tax returns, military purposes, passports, driver's license, vehicle registrations, insurance policies, professional licenses or certificates, subscriptions for newspapers, magazines, and other publications, and monthly statements for credit cards, utilities, bank accounts, loans, insurance, or any other bill or item that requires a response. (NOTE: THESE ARE SECONDARY FACTORS)(5) Civic ties, such as church membership, club membership, or lodge membership.(6) Professional ties, such as licensure by a licensing agency or membership in a business association.(7) Payment of state income taxes.
(8) Place of employment or, if self-employed, place where business is conducted.(9) Location of healthcare providers, such as doctors, dentists, veterinarians, and pharmacists.(10) Voter registration and ballots cast, whether in person or by absentee ballot. (NOTE: this is a primary factor if registered to vote in local and state elections; it is a secondary factor if on the National Elections, you use a NC address; it is an other if you do not list a NC address)(11) Occasional visits or spending one's leave "at home" if a member of the armed services.(12) Ownership of a home, insuring a home as a primary residence, or deferring gain on the sale of a home as a primary residence.(13) Location of pets.(14) Attendance of the taxpayer or the taxpayer's children at State supported colleges or universities on a basis of residence--taking advantage of lower tuition fees.(15) Location of activities for everyday "hometown" living, such as grocery shopping, haircuts, video rentals, dry cleaning, fueling vehicles, and automated banking transactions.(16) Utility usage, including electricity, gas, telecommunications, and cable television.(c) When Change Occurs. -- The following events indicate a change in residency:(1) Selling a house and buying a new one.(2) Directing the U.S. Postal Service to forward mail to a new address.(3) Notifying senders of statements, bills, subscriptions, and similar items of a new address.(4) Transferring family medical records to a new healthcare provider.(5) Registering a vehicle in a new jurisdiction.(6) Transferring memberships for church, a health club, a lodge, or a similar activity.(7) Applying for professional certifications in a new jurisdiction.(d) Military Service. --A legal resident of North Carolina serving in the United States Armed Forces is liable for North Carolina income tax and North Carolina income tax shall be withheld from that individual's military pay whether the individual is stationed in this State or in some other state or country. An individual who enters military service while a resident of North Carolina is presumed to be a resident of this State for income tax purposes. Residency in this State is not abandoned until residency is established elsewhere. To change residency, an individual in military service must not only be present in the new location with the intention of making it a new domicile, but must also factually establish that the individual has done so.
6. You asked about NC coming after Taxes. If you can successfully prove you truly abandoned NC WITH NO INTENTION of returning, then you can avoid the taxes for all but the year in which you departed. If not, then NC can go back as far as they want, including the entire 10 years. This is is because, in NC there is no statute of limitations with regard to taxes where it involves acts of omission or fraud. Not filing a return at all, is considered an act of omission, and there for, the statute does not apply.
From the state perspective, the following elements may harm your position:
If you own a home in the country in which you are currently living, and you can divest of the other connections, you will most likely be able to prove a permanent residence overseas; else you would need to show a permanent residence in another state.
Remember: It only takes a couple or a few of the factors in the law to consider you a resident for tax purposes in NC law; not the entire list.
Thanks so much for your thoroughness. I will definitely need some more help with this issue as I respond to NC's letter. A lot of the "incriminating" evidence that I maintain in NC is due to employment and locale requirements, such as a "valid state driver's license" in order to be legally licensed overseas and on US facilities, and a current state teacher's certificate in order to maintain mine from DoDDS. We kept a bank account there for convenience, even though we opened another one with the overseas contracted bank that operates on military facilities. Even though NC is the last state I lived in with my husband and children, I only established NC as my home of record when I accepted a transfer from Germany to Japan in 2002 because my daughter and family had moved there. If they were to move, I would not have immediate family there. Anyway, I will start by writing them a letter with the evidence of a permanent change of station and wait for their reply. I do appreciate your advice and expertise.
Thank you for your comments and feedback.
Just a question. If your married daugheter is in another state, that does not have an income tax, why don't you just get a driver's license in that state, using her address?
I understand. AND being a professor, I am sure you will be able to word things just right, and build a good case for yourself to justify that you should no be taxed by NC.
I am going to keep you in my thoughts, and hope that you are successful.