As we all know, all US citizens are required to file a federal tax return every year as long as income exceeds the minimum filing requirements. However, some digital nomads might also need to file a state tax return if they keep a state residency. Fortunately, it’s easy enough to change your state residency as a digital nomad or RVer.
How to Determine State Residency or Domicile
Often, digital nomads don’t change their residency from the state they lived in before being mobile. That’s a perfectly fine option for some.
On the other hand, others try to change their domicile or residency status right away and separate ties with their former state.
However, there are some states that make it more challenging to “leave” or separate ties. Typically, you will be considered a resident if you lived in a given state for more than half of the year. That makes it easy to know your residency or domicile state.
What if you don’t spend any length of time in any one state?
The key to knowing whether you are still considered a resident of a state for tax purposes is to answer the following questions.
1. Do you still own a home or property?
2. Where does your family (spouse and/or children) live?
3. What state issued your driver’s license or ID card?
4. Where are you registered to vote?
5. Where is your vehicle (s) registered?
6. Where do you get mail?
As you start to try to separate yourself from your previous resident state, you do need to take into account some other considerations. These will all aid in trying to change your state residency as a digital nomad.
There are some states that make it more difficult to separate ties and use the slightest tie to tax former residents.
On the opposite side, there are seven states with no income tax at all. You might already be familiar with these ones as some of them are popular options to change your state residency as a digital nomad. These are a great option for travelers and nomads because there is no need to file a state tax return as a resident.
(Additionally, Tennessee and New Hampshire only assess income tax on dividends and interest income, so they make a decent option as well.)
So, now it’s up to you to determine, based on the above facts, if it’s good to change your residency as a digital nomad or not.
Take Note: If you have earned income sourced from work done or rental property in a given state, you will generally have to report that income regardless of whether or not you are a resident. This earned income could include workamping or camp hosting work.
How to Change Your State Residency as a Digital Nomad
To change your state residency as a digital nomad, you will need to complete the following things:
1. Terminate your residency in your former state
2. Establish domicile in a new state
How do you accomplish this, you ask?
Let’s review the steps so it’s clear what you need to do.
1. Terminate Ties With Your Former State
Terminating your state residency is not always an easy task.
However, on the simple side, it could mean “moving” to a new state. For the more complicated or difficult state, it can require a little more effort on your part.
Either way, I suggest checking the following items off your to-do list as you change your state residency as a digital nomad.
1. Sell any property that ties you to a state. Keeping a rental property is ok.
2. Close bank accounts that have ties to a particular state. Switch to an online bank or open a new bank account in your new state.
3. Get a driver’s license or ID card from your new state.
4. Register to vote in your new state.
5. Change your vehicle registration to the new state.
6. Make sure to cut ties with any local clubs or business associations. You can move your clubs or organizations to the new state if you want.
7. Only use your new state mailing address. There are quite a few options for virtual mail services for those who are nomadic.
Lastly, you can check residency requirements from your former state to make sure there is nothing else you need to do to make sure your ties are cut. This way they hopefully won’t require you to file a resident tax return with them and you won’t owe state taxes.
2. Establish Domicile in a New State
Once you’ve done the items on the above list or at least, most of them, you should now have established domicile in your new state.
Generally, you would want to pick an income-tax-free state.
This way you won’t be paying a state income tax to a place you no longer live.
However, I’ve seen plenty of reasons digital nomads keep their old state.
Once you know where you want to establish residency, review the requirements to be considered a resident in that state. They are all different.
For example, South Dakota only requires one night’s stay.
Florida doesn’t have such a requirement but you will have to meet other items to successfully get a driver’s license and/or register a vehicle there.
Generally, speaking the best and most popular states for digital nomads because of their easy to comply with rules are
One last thing to consider before you move all your legal stuff to a new state.
Will you keep this lifestyle for more than a year?
Often I give the advice to test the waters and see if you love the digital nomad lifestyle. For some, it’s not a good fit and they come off the road in 6 months or a year. If it’s not a good fit and you didn’t move out of state, it’s easy to slide right back into your previous life and state. You didn’t waste time or energy or money on the “move”.
For others, the lifestyle is a perfect fit, and making the move to a tax-free state makes complete sense.
It’s up to you if you want to jump right in and move all the stuff to a tax-free state or wait at least a few months to make the change.
Other things to consider as you change your state residency as a digital nomad include:
Health insurance: Will you need to buy your own? Is there a plan that fits your needs in the new state? What’s the cost?
Vehicle registration and insurance costs: Check out the different options for mail services and get insurance quotes for the zip codes where they are located. This might help determine the best fit for you.
State vehicle requirements: Will you need a special driver’s license? Is there a vehicle inspection?
I recommend consulting with a tax professional to help you with this process should you have any questions. They can help you avoid costly mistakes or getting a letter from a state taxing authority. Avoiding a costly mistake when it comes to taxes is a good idea.
After you take all the above into consideration, make your move. Do what fits you and your family the best.
And then… enjoy the open road!