The US has a complex tax system that includes Federal, State and local taxes. Most States have an Income Tax regime which runs separately to the IRS and with State Income Tax rates as high as 13.30%. Here’s what individuals moving to/from the US need to know.

There is no uniformity in the State Income Tax regime with different filing thresholds, claims for deductions and deadlines. While some US States don't have an Income Tax regime (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming), California and New York have the highest Income Tax rates at 13.30% and 10.90% (2024) respectively. Without careful planning, you could face an unexpected tax bill as high as 58.3% (45% UK Income Tax and State Tax). Below, we have highlighted the key issues you should be aware of.

Moving from the US to the UK

You may still be considered a State tax resident and continue to subject your worldwide income and gains to State tax if you don't lose your State domicile. Domicile refers to your permanent home and where you intend to return to after being away. You can only have one domicile. Each State’s tax regulations need to be reviewed for exceptions. For example, California has a safe-harbor test which allows certain individuals with a California domicile to be treated as a non-resident of California. Broadly, you need to be outside of California under an employed-related contract for an uninterrupted period of at least 546 consecutive days and your return visits to California do not exceed a total of 45 days during any taxable year covered by the employment contract. As part of your move, if you rent out your former private residence, you will continue to file a State Income Tax return to report the rental income and expenses on an annual basis. If the US rental income is subject to UK tax, you can take any State Income Tax paid as a foreign tax credit on the UK tax return. You should review your investments ahead of a move to the UK. For example, municipal State bonds may be free of State tax, but they could be subject to UK Income Tax rates of up to 45%.

Moving from the UK to the US

When you move to the US, you need to review the residency rules of your chosen State to see whether you're subject to State tax from the first day you're present. For example, you will become California resident if you're present in California for other than a temporary or transitory purpose. However, you will only become New York State (NYS) resident if you maintain a permanent place of abode in the State for substantially all of the taxable year, and you spend 184 days or more in the State during the taxable year. As there is no tax treaty between the UK and each US State, you will need to review whether the State recognises Federal treaty positions. If the State doesn't accept the US/UK tax treaty provisions, any treaty positions taken on the federal tax return may need to be reversed when preparing the State tax return. For example, under the US/UK double tax treaty, the 25% tax free lump sum from a pension is tax free in both the UK and at Federal level, but if you’re resident in California, you would not be able to claim the exception under the treaty and the full amount would be included on your California State tax return. However, if you were resident in New York, you would not include the tax-free lump sum as part of your income as it follows the Federal Adjusted Gross Income.

State workdays

If you spend time working in a State of which you are not resident of, you may trigger a State tax return filing requirement. The number of workdays is dependent on each State’s filing requirements and thresholds. Due to various rules across all States, the Multistate Tax Commission proposed a 20-workday rule, however, it was not uniformly enacted by all States. In addition, some States like New York have a ‘convenience of the employer’ rule whereby non-residents of NYS working for an NYS employer can be taxable on their wages for NYS purposes if they work outside NYS for their own convenience. If you're a US resident taxpayer, you will need to determine if your home State offers credit for taxes paid in another State jurisdiction. If you're a UK resident taxpayer, you can claim double tax relief via your UK tax return. To minimise the impact of the above issues, we recommend that you keep a detailed travel schedule of your movement.

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