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My wife is a freelance web developer, formerly residing and paying taxes in NY. She left her job in December 2011. We moved to Italy (where I am employed by the U.S. government) in January 2012.

Since arriving in Italy, she has accepted freelance work from U.S. customers, and has begun to receive payment for this income.

Obviously, we need to claim her income on Federal taxes.

The question is, does she also need to pay state taxes on this income?

  • She does not physically reside in any state.
  • She does not work for a business in any state.
  • I continue to pay IN taxes (it is where I began my federal employment) even while overseas.

Any ideas?

Clarification: This is concerning taxes we will pay for income earned in 2012

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  • Surely she isn't even liable to US Federal taxes but would instead have to pay Italian taxes, as that will her places of residency.
    – psatek
    Feb 15, 2012 at 16:34
  • While we may live in Italy, our place of residency is technically the US, due to the unique nature of my employment overseas.
    – Mike Christiansen
    Feb 15, 2012 at 21:59
  • I thought this might be the case given that you were asking the question is this some sort of Ex pat deal/ embassy role? It might be worth checking with employer as the deal may cover you (and your income) but not your spouses.
    – psatek
    Feb 16, 2012 at 10:04
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    @psatek - Not true, Americans working and/or living abroad still owe US Federal income taxes on what they earn in most cases.
    – JohnFx ♦
    Feb 16, 2012 at 20:03
  • @psatek - Its military. Since my wife is from NY, and was working for a NY company, then she filed NY. Now that we moved out of NY, if we were living in the US, she would file IN taxes (since that's where I'm from, and she was forced to move. However, since she does not actually work for a company that is based in the USA, she does not live in the USA, does she have a tax domicile in the USA?
    – Mike Christiansen
    Feb 17, 2012 at 15:23

2 Answers 2

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No state taxes, but Italy also has a favorable treaty with the US Federal Government. Look into to lowering your federal taxes to 5% ;)

its a thick read, http://www.irs.gov/businesses/international/article/0,,id=169601,00.html

and also try to determine if the Foreign Earned Income Exclusion applies to you, reducing your Federal tax to ZERO on the first $95,100 earned abroad.

http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html

but then you may be subject to a 20%+ italy tax. so maybe you should just try for the tax treaty

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  • For reference, is there a document in place that states that in this situation, we would not pay taxes? I just don't wanna get burned!
    – Mike Christiansen
    Jun 13, 2012 at 7:17
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    no STATE taxes. Individual united states only collect tax on "source income". You will still be liable for Federal Taxes and Italy taxes.
    – CQM
    Jun 13, 2012 at 15:00
  • Thanks for your help. Since we exist in an american "bubble" for tax purposes, we would not pay Italian taxes. (I pay federal and state, as a military member, but no Italian)
    – Mike Christiansen
    Jun 14, 2012 at 7:40
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    you never mentioned you were on a base
    – CQM
    Jun 14, 2012 at 15:08
  • I'm sorry, I thought I mentioned I was military. The agreement between the US govt and the Italian govt is that we may not take an Italian job. The only jobs we are allowed to take are ones on base, and only some of them. If my wife was working an on base job, surely she would fall under the same tax domicile as I do, due to the Military Spouse Residency Releif Act. But since she is working freelance, for herself, for stateside sources...? Would it be the same as if she was working on base? I hope not, I hate Indiana taxes.
    – Mike Christiansen
    Jun 15, 2012 at 6:46
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New York will want to you to pay taxes on income from "New York sources". I'm not sure what this means to a freelance web developer.

If your wife is doing freelance web development under the same business entity as she did in New York (ie. a New York sole proprietor, corporation, etc), you probably do need to file.

From nonresident tax form manual:

http://tax.ny.gov/pdf/2011/inc/it203i_2011.pdf

If you were a nonresident of New York State, you are subject to New York State tax on income you received from New York State sources in 2011. If you were a resident of New York State for only part of 2011, you are subject to New York State tax on all income you received while you were a resident of the state and on income you received from New York State sources while you were a nonresident.

To compute the amount of tax due, use Form IT-203, Nonresident and Part-Year Resident Income Tax Return. You will compute a base tax as if you were a full-year resident, then determine the percentage of your income that is subject to New York State tax and the amount of tax apportioned to New York State.

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  • From my reading of that document, she would not have to file NY taxes. Here is my logic: Since we held a residence in NY for only four days, and no NY income was earned during that time, we pay no resident taxes. Since she is not earning any income from a NY source during the rest of the year, then she pays no taxes to NY. I guess the only question now is whether or not her payments from customers count as "income sources" from different states. If so, we could end up filing as many as 10-15 state taxes
    – Mike Christiansen
    Feb 14, 2012 at 18:58

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