If you’re a U.S. citizen living in Israel, making Aliyah mid-year, or juggling homes across multiple states, state tax compliance can be quite confusing.
Let’s walk through some core concepts regarding state tax filings, especially what to keep in mind if you’re a US citizen living abroad.
Most States tax individuals based on two main factors – residency and source of income.
1. Residency Is About Intent — Not Just Where You Sleep
States generally classify individuals as one of the following:
- Resident – taxed on all income, regardless of where it’s earned
- Nonresident – taxed only on income sourced to that state
- Part-YearResident – has two components:
- Resident portion – taxes all income (active and passive) earned while you were a resident
- Nonresident portion – taxes only income sourced to that state after residency ended
A taxpayer is generally considered a resident of a state if:
- The state is your Domicile – your true, fixed, permanent home. Supporting facts include driver’s license, voter registration, vehicle registration, and where your family lives. OR:
- The taxpayer meets the state’s Statutory residency rules– many states apply a “permanent home + 183 days” rule
A college student or someone owning multiple homes needs to establish for themselves where their permanent residence is for tax purposes.
2. Income Is Taxed Where It Is Sourced
Most common categories of income that can trigger state tax obligations include:
- W-2 wages Typically W2 wages are sourced to the state where the work is physically done. Remote work has become a huge audit trigger because a W2 still might source income to a specific state even when the work is physically done from home in a different state or in an entirely different country! Some states enforce ‘convenience of the employer’ rules; meaning wages may still be taxed by the employer state even if the employee is remote. If you work remotely for your own convenience rather than because the employer requires it in another state, the state may still tax the income as if you worked in their state. Some states are more difficult than others regarding telecommunication. (NY is one such state)
- K-1 partnership income – many entities operate in multiple states
- Rental real estate – rental income is always taxed first in the state where the property is located
3. Credits for Taxes Paid to Other States
When two states tax the same income, more common with resident state returns, a credit may apply — but it is not automatic. If a taxpayer is a resident of one state (such as NY) but works in NJ, NJ will tax the wages earned in NJ and then NY will take tax credit on that income. If the second state has a higher tax rate, than the tax credit paid to the first state will not be enough and the taxpayer may be charged excess tax.
4. Part-Year vs. Nonresident Returns
| Return Type | When It Applies | Example | |
| Part-Year Resident | You physically moved into or out of a state during the year (e.g., made Aliyah in July). | Made Aliyah in July; a part year resident state tax filing will be required for Jan-July | |
| Nonresident | You don’t live in the state, but income is sourced there. | A US citizen lives in Israel but owns a rental property in the US or receives a K1 from partnership income; a nonresident state return will be required for the state sourced income | |
| A US citizen earns W2 wages while being physically present in a state but you are not a resident of that state |
5. Practical Compliance Tips
Here are some practical takeaways if you earned income while being physically present in the US or have state sourced income while living exclusively abroad:
- Track days present in the US when allocating income between US and Israel. Track days present in each state if traveling for business around the US.
- Some states do not allow e-filing with a foreign address and those returns will need to be paper filed via postal service.
- If a US citizen receives a W2 while living abroad, it may be difficult to prove telecommunication as a convenience of the employer to some states (most notably NY) so it may be best to update your address with the employer to avoid states taxes being withheld to begin with.
- Many states won’t honor the federal Israel war extension given by the IRS. Even though no additional interest/penalties will be calculated for federal income tax, state interest and penalties will still apply so it’s important to pay state tax in a timely manner.
Disclaimer:
This article is for educational purposes only and does not constitute tax or legal advice. Each taxpayer’s situation is unique and should be reviewed individually with a qualified tax professional.