Deciding to leave your home state as a US expat can quickly get complicated when it comes to taxes. If you’re weighing the move, it’s essential to understand the state residency exit tax implications that might follow you even after you say goodbye to your current address.

Some states impose rules that mirror or supplement the federal expatriation tax, while others have unique policies that hit you at the moment you decide to become a nonresident. Before you pack your bags, you should know exactly how your departure could affect your wallet. This article walks you through key considerations, from understanding domicile to avoiding tax pitfalls in high-tax states.

Understand state residency taxes

For many, “exit tax” conjures images of the federal expatriation tax under Internal Revenue Code (IRC) sections 877 and 877A. These rules primarily target individuals renouncing US citizenship or shedding long-term resident status for federal tax purposes. However, certain states have their own ways of maintaining a tax grip, especially if you hold property or still spend significant time on their soil.

State residency exit tax implications vary widely, so you’d be wise to check your state’s specific regulations. In California, for instance, you may face ongoing tax obligations if you maintain a home or generate income in the state, even after moving. Meanwhile, states like New Jersey withhold a percentage of profits from your home sale as a prepayment on your final tax bill, ensuring they collect what they believe is their fair share.

Clarify federal vs. state exit taxes

Federal exit tax rules apply if you become a “covered expatriate” under specific criteria, such as having a net worth of $2 million or more or failing to certify five years of tax compliance. At the federal level, this triggers a “mark-to-market” scenario, where you’re treated as if you sold all your assets the day before leaving.

By contrast, state taxes hinge on whether you have effectively changed your “domicile” and severed ties. This can be trickier than it sounds. Each state defines residency a bit differently, making it possible for you to owe taxes in multiple states if you don’t plan carefully.

Recognize key triggers for expatriates

The moment you set your sights on relinquishing US citizenship or long-term residency, you should consider immediate steps to confirm you won’t inadvertently remain tethered to an old domicile. States often look at factors like where your driver’s license is registered, where your family lives, and where your children attend school. Even small details, such as where your car is insured, can matter when auditors attempt to confirm or challenge your self-proclaimed residency status. If you keep a permanent place of abode in your old state, you could still be on the hook for income taxes.

Beyond your physical presence, remember to address any outstanding filing or reporting obligations. Failure to file Form 8854 to certify five years of tax compliance automatically places you in the “covered expatriate” category, which means hefty exit tax bills on unrealized gains. To avoid such surprises, it pays to track your compliance meticulously and investigate programs like the Streamlined Filing Compliance Procedures if you have missed any past returns. Staying proactive helps you sidestep major headaches down the road.

Avoid pitfalls in high-tax states

California is a prime example of how states can keep you on the hook. Its residency rules and proposed wealth taxes can apply long after you’ve loaded your moving truck, especially if you still possess significant assets or spend time within state lines.

New Jersey similarly collects taxes upfront on home sales by nonresidents, demanding either 8.97% of the profit or 2% of the sale price, whichever is higher. That can cause real sticker shock if you don’t plan for it, especially when combined with other potential tax obligations.

Break domicile the right way

Establishing a new legal home involves much more than renting or buying a place in another state. You typically must demonstrate intent to remain there indefinitely, which involves updating your driver’s license, voter registration, and banking relationships. If you want to learn more about the intricacies of parting ways with your old state, explore breaking domicile for state taxes and state tax residency exit planning for guidance.

You’ll also need to inform your employer so that correct state withholdings are taken from your pay. By documenting changes thoroughly, such as saving moving receipts or re-registering your car, you make a stronger case that your new home is your true domicile.

Stay compliant with IRS rules

Even if you successfully break state domicile, the federal government can impose additional taxes through the expatriation tax if you meet certain criteria. For 2025, being labeled a covered expatriate might depend on your average annual tax liability exceeding $206,000 or if your net worth is $2 million or more. In that scenario, the mark-to-market method used by the IRS treats your global assets as sold and taxes any unrealized gains above an inflation-adjusted threshold (around $890,000 in 2025). This can be devastating if you haven’t prepared.

On top of that, you should keep meticulous track of required filings such as FBARs if you hold foreign financial accounts. Failure to comply can hasten or guarantee your covered expatriate status. When in doubt, consider professional help to avoid oversights. Our team at American Pacific Tax is here to guide you step by step.

Consider a proper exit strategy

The best approach is to plan ahead. If you suspect that your combined federal and state obligations could skyrocket, you might structure asset sales or transfers well before the move to reduce potential taxes. Similarly, reviewing your estate plan to match your new state’s (or country’s) laws saves trouble if your old state tries to claim estate taxes down the line.

You can explore a detailed to-do list in our helpful state residency exit checklist. It’s full of practical ways to prove your domicile shift and fulfill state and federal obligations simultaneously. That level of organization can help you avoid drawn-out residency audits and financial penalties.

Call to action

If you’re looking for personalized guidance on your unique relocation journey, reach out to American Pacific Tax for a consultation. Our experts can walk you through everything from domicile change exit strategies to state residency termination guidelines. Set yourself up for a smooth transition by getting the facts right from day one.

Frequently asked questions

Q1: Do all states have an exit tax for leaving?
No. Most states don’t have a single “exit tax.” However, states like California and New Jersey have unique rules that effectively operate like one by taxing your net worth or withholding tax on real estate sales.

Q2: How do I prove I’ve changed my domicile?
You typically show evidence of a permanent home elsewhere. That might include a new driver’s license, voter registration, long-term lease or purchase, and other documents that support your intent to stay there indefinitely.

Q3: Can I owe taxes in my new state if I still have property in my old state?
Yes. Owning property in your previous state can keep you on the tax hook if that state deems you a resident or if you collect rental income there. Proper planning ensures you don’t wind up paying tax twice.

Q4: Can I avoid the federal exit tax altogether?
You can avoid it by not meeting covered expatriate criteria. Keep your net worth below $2 million if possible, and ensure five years of tax compliance to limit the risk. In some cases, participating in compliance programs can also help.

Q5: Do I need a tax advisor if I’m moving states?
You probably do. Each state’s rules differ, and small oversights can cost you big. Working with a knowledgeable professional can help you dodge pitfalls and hold onto more of your money.

Key takeaways

  • State residency exit tax implications arise when your old state claims you as a resident for tax purposes even after moving.
  • High-tax states like California and New Jersey impose special rules on wealthy or departing residents.
  • Breaking domicile requires clear steps, such as updating official documents and avoiding conflicting ties to your old state.
  • You must also maintain full compliance with federal rules to sidestep potential expatriation taxes.
  • Careful planning, backed by professional expertise, helps you stay organized and minimizes costly surprises.