Taxation in Different States: A Complete Guide for US Taxpayers Living Abroad
Taxation in different states across the United States is one of the most frequently misunderstood aspects of American tax compliance — especially for US citizens and green card holders living in Israel. Unlike the federal tax system, which applies uniformly nationwide, state tax obligations vary dramatically depending on where you last lived, where you earn income, and how each state defines residency. Understanding these differences is essential to avoiding unexpected tax bills, double taxation, and costly penalties.
Whether you recently relocated from the US to Israel or you maintain financial ties to a specific state, this guide will walk you through everything you need to know about US state income taxation, how it interacts with Israeli tax obligations, and what steps you can take to stay compliant.
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What Is State Income Tax and Why Does Taxation in Different States Matter?
The United States operates a dual tax system: taxpayers may owe income taxes both to the federal government and to the individual state in which they reside or earn income. While federal tax rates are set by the Internal Revenue Service (IRS) and apply equally across the country, each state sets its own rules, rates, and exemptions.
For Americans abroad, state taxation in different states can create a serious and often overlooked compliance burden. Many expats assume that once they leave the US, they are no longer liable for state taxes. This is frequently incorrect. Several states — most notably California, New York, and Virginia — are known as “high-residency threshold” states that continue to tax former residents until those individuals can prove they have permanently severed all ties with the state.
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States With No Income Tax: The Seven Exceptions
Only seven states in the United States impose no statewide income tax on wages and salaries. These are:
| State | Notes |
|---|---|
| Alaska | No income tax; relies on oil revenues |
| Florida | Popular relocation destination; no income tax |
| Nevada | No income tax; gaming revenue dependent |
| South Dakota | No income tax; low overall tax burden |
| Texas | No income tax; higher property taxes |
| Washington | No income tax on wages (capital gains tax enacted 2023) |
| Wyoming | No income tax; mineral royalty revenue |
If you were a resident of one of these seven states before moving abroad, you generally have no ongoing state income tax obligation — making relocation planning a valuable tax strategy.
Tennessee and New Hampshire previously taxed only investment income but have since fully eliminated their income taxes, joining this list in recent years.
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How Taxation in Different States Affects US Expats in Israel
For Americans living in Israel, state income tax is an often-overlooked layer of tax complexity. Here is how the key rules typically work:
Domicile vs. Residency: Most states use a concept called “domicile” — your permanent home — to determine ongoing tax liability. Simply living abroad for several years does not automatically terminate your domicile in a state like California or New York.
Sourced Income: Even if you are no longer a resident of a state, you may owe taxes on income sourced from that state — for example, rental income from a property you own in New York, or consulting fees paid by a California-based company.
Treaty Limitations: The US-Israel Tax Treaty covers federal taxes but does not extend to US state taxes. This means that credits available under the treaty for relieving double taxation between the US and Israel do not apply at the state level.
Municipal Taxes: In addition to state taxes, several cities — including New York City, Philadelphia, and San Francisco — impose their own municipal income taxes. These are generally not recognized for offset against Israeli income tax, unlike federal taxes.
For a full breakdown of how foreign tax credits work at the federal level, see our guide on Foreign Tax Credits for Americans Abroad.
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State Tax Rates: A Comparative Overview
Most US states that do impose income tax use a graduated (progressive) rate structure, similar to the federal system, where higher income is taxed at higher rates. A smaller number use a flat rate applied to all taxable income.
The following table summarizes income tax rates across major US states as of 2024:
| State | Tax Structure | Top Marginal Rate |
|---|---|---|
| California | Progressive | 13.3% |
| New York | Progressive | 10.9% |
| New Jersey | Progressive | 10.75% |
| Oregon | Progressive | 9.9% |
| Minnesota | Progressive | 9.85% |
| Illinois | Flat | 4.95% |
| Pennsylvania | Flat | 3.07% |
| Texas | None | 0% |
| Florida | None | 0% |
These state taxes are generally deductible for federal tax purposes (subject to the $10,000 SALT cap introduced by the 2017 Tax Cuts and Jobs Act). They may also be offset against Israeli income tax under certain conditions — but this depends heavily on the specific treaty provisions and Israeli tax authority interpretations.
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Severing State Tax Residency: What Expats Need to Do
If you are an American living in Israel and want to terminate your state tax obligations, simply moving abroad is not enough. Most aggressive-residency states require you to take affirmative steps to demonstrate that you have abandoned your previous domicile. Key steps typically include:
- Changing your driver’s license to a non-US license or to a state with no income tax.
- Closing or transferring bank accounts held in your previous state.
- Selling or renting out property in the former state of residence.
- Re-registering vehicles outside the original state.
- Updating your voter registration, professional licenses, and legal documents.
- Filing a final year state return clearly marked as a part-year or non-resident return.
California’s Franchise Tax Board and New York’s Department of Taxation are known for auditing former residents who claim to have left the state while maintaining substantial connections. Keeping detailed documentation of your departure is critical.
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Federal Reporting Obligations That Interact With State Taxes
While state taxes are assessed separately from federal obligations, there are several federal filing requirements that expats must also manage — and these can have indirect effects on your state tax picture.
FBAR (FinCEN 114): If you hold foreign bank accounts — including Israeli accounts — with an aggregate value exceeding $10,000 at any point during the year, you must file an FBAR with the Financial Crimes Enforcement Network (FinCEN). See our full FBAR Guide for more details.
FATCA (Form 8938): Americans with significant foreign financial assets must also report them under FATCA. Some states reference your federal adjusted gross income (AGI) — which can be affected by FATCA-related inclusions — when calculating state taxable income. Learn more at our FATCA Reporting page.
Social Security: Even Americans living abroad may owe US Social Security and Medicare taxes on self-employment income. The Social Security Administration (SSA) provides guidance on totalization agreements, including the US-Israel totalization agreement, which can prevent double taxation of Social Security contributions.
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Common Mistakes US Expats Make With State Taxes
Understanding what not to do is just as important as knowing the rules. Here are the most frequent and costly mistakes we see:
- Assuming departure terminates state tax liability automatically — it does not in many states.
- Failing to file a final state return when leaving the US, which leaves the file open indefinitely.
- Not accounting for state taxes when calculating whether you qualify for the Foreign Earned Income Exclusion (FEIE) — which applies federally but has no state equivalent in most states.
- Ignoring municipal taxes on US-sourced income, particularly New York City tax, which applies even to non-residents earning NYC-sourced income.
- Missing deadlines: Most state returns follow the federal April 15 deadline, with a June 15 automatic extension for taxpayers living abroad — but this does not always apply equally at the state level.
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How Tax4us Can Help You Navigate Taxation in Different States
Navigating taxation in different states as an American abroad requires specialized expertise that combines US federal tax law, Israeli tax law, and the specific rules of the relevant state. A one-size-fits-all approach simply does not work.
At Tax4us, we specialize in US-Israel cross-border taxation. Our team of licensed tax professionals can help you:
- Determine whether you still have an active state tax filing obligation.
- Properly sever residency ties with high-threshold states like California and New York.
- Claim all available credits and deductions at both the federal and state level.
- Coordinate your US tax filings with your Israeli tax reporting to minimize overall tax burden.
Whether you need help with an initial consultation, a catch-up filing, or ongoing annual compliance, we are here to guide you. Explore our services or contact us directly to schedule a consultation with a qualified US tax expert.
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Summary
Taxation in different states across the US is not a single, uniform system — it is a complex patchwork of rules, rates, and residency definitions that can catch even well-informed Americans abroad off guard. From the seven states with no income tax at all, to aggressive states like California that may follow you overseas for years, the stakes are high and the rules are unforgiving.
By understanding how state taxes work, taking affirmative steps to sever residency where appropriate, and coordinating your filings carefully across federal, state, and Israeli systems, you can avoid unnecessary tax exposure and stay fully compliant. When in doubt, seek professional guidance — the cost of expert advice is almost always far less than the cost of getting it wrong.