State Income Tax Considerations

by Tom Andrews, CPA

More often than not crewmembers fail to take into account the prospect of state income tax liabilities.   While many US flagged vessels withhold federal payroll and income taxes and only a fraction of foreign flagged vessels withhold federal income taxes these vessels rarely withhold state income taxes.  There are currently seven states that do not have a state income tax, those are Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming and there are two states that only have an income tax on dividends and interest, those are Tennessee and New Hampshire.  If you are not a resident of one of those states you will want to seek advice or contemplate your situation before the end of the year.  Failure to make timely estimated tax payments may result in penalties if left until the time you file your tax return.

In our experience most crewmembers earning under $100,000 per year will owe between 4% and 7% in state income tax. Most states allow you to make estimated tax payments directly through their websites.  If for example you are a resident of Maine you will want to visit the Maine Department of Revenue website and there you will find instructions on how to make state estimated tax payments to the State of Maine.  It should be noted that if you are receiving pay check stubs and taxes are being withheld you will want to confirm if state income taxes are being withheld as well, if only federal income tax is being withheld you are still required to make estimated tax payments to your state of residency.  Do not wait until you file your tax return to make these estimated tax payments, some states have set penalties for failure to make timely estimated tax payments.

For those crewmembers that qualify for the foreign earned income exclusion you may want to seek advice from your accountant as to whether your state recognizes the exclusion, while a portion of your income may be exempt for federal income tax purposes your income may be taxable under state tax law.

Some crewmembers will attempt to avoid state income tax by simply using an address that is in a state with no state income tax. Before you change your residency please review the residency requirements for the state that you plan on moving to.  Most states require that you be living in that state for a full year before that state will recognize you as a resident for tax purposes.  Also if your residency does change your former state may request proof of your new residency.  Once you stop filing a return in your former state you may receive a letter from that state asking why you are no longer filing.  Since every state is different I recommend you review the specific filing requirements of the state to which you a resident.

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