H-1B Exit Trap: How to Navigate State Tax Residency After Leaving

(CALIFORNIA) California tax officials are reminding departing foreign workers that leaving the United States 🇺🇸 does not automatically end state tax residency—especially for people who keep strong ties to the state. Immigration lawyers say H-1B holders and other temporary workers are at particular risk of a surprise state tax bill the year they move abroad, even when they fail the federal Substantial Presence Test and become nonresidents for federal tax purposes.

According to analysis by VisaVerge.com, states like California, New York, New Jersey, and Virginia keep focusing on “domicile” and personal ties, not just days in the state, creating a costly “exit trap” for those who do not plan ahead.

Federal vs. state residency: the core conflict

The core conflict is simple but easy to miss during an international move: federal and state rules do not align. Federal tax residency is determined by days in the country and certain exceptions. State tax residency often turns on where your “domicile” is—your real, fixed home where you plan to return.

In practice, that means you can be a federal nonresident and still be a full-year resident for state tax if your old life in California looks active on paper. That gap can trigger state tax on worldwide income, including salary earned after you relocate abroad.

Officials and practitioners say the risk is highest for people who:

• Leave in the second half of the year
• Keep an apartment or house
• Hold a valid California driver’s license
• Return for frequent visits
• Leave a spouse or child in the state

Other ties that suggest ongoing residency include rental property ownership, active voter registration, and a state payroll or mailing address. While each state applies its own test, the trend is similar: when your move appears temporary—or your home ties remain deep—the state may treat you as still domiciled there.

Illustration: a common scenario

Priya, an H-1B software engineer, takes a role in Bengaluru in September. She:

• Keeps her San Jose apartment in her name “just in case”
• Renews her California driver’s license online
• Leaves U.S. bank accounts unchanged with the same tax address
• Plans a December holiday in the Bay Area

The next spring, a notice arrives: California expects a resident return, with tax due on her India salary from September through December. California’s view: Priya did not change her domicile—her actions looked like a temporary assignment abroad, not a permanent move.

Tax professionals say Priya could have avoided this outcome with stronger exit planning before the move date.

How domicile rules keep you tied to a state

Under state law, domicile is about intent shown through actions. States often list factors and then weigh the total picture. California, for example, points to:

• Where you maintain a home
• Where your spouse and children live
• The state of your driver’s license
• Where you register to vote
• Your primary bank and investment accounts
• Where you keep personal items
• How often you return

None of these alone decides the case; collectively they paint a story. Keep enough ties, and the story reads as: you still live here.

“Selling or closing your California home, moving your family, changing your driver’s license, updating your banking and mailing address abroad, and establishing a permanent home outside the state all help prove a new domicile.” — California Franchise Tax Board guidance

For official criteria and examples, see the Franchise Tax Board residency guidance. New York, New Jersey, and Virginia publish similar factor lists and also apply a 183-day physical presence rule for statutory residency in many cases.

Key tie-makers that extend state tax residency

• Maintaining a home or lease in your name (including a “backup” apartment)
• Holding a state driver’s license or ID after departure
• Leaving a spouse or child in the state for work or school
• Owning rental property and managing it directly
• Returning frequently for long visits or remote work stints
• Using a state mailing or payroll address
• Voting in state elections (citizens only; noncitizens must never vote)

What this means for your taxes

• A state may claim you as a full-year resident, taxing your global income
• Or treat you as a part-year resident, taxing income during the resident period
• Even as a nonresident, you may owe tax on in-state income (such as rent)

Immigration status and timing wrinkles

Immigration status adds complications. H-1B, L-1, F-1, and O-1 workers often coordinate last U.S. work days, visa grace periods, and foreign start dates with tax timing. When the visa clock and the tax calendar do not align, missteps follow.

Example: an H-1B professional exits in October but keeps payroll tied to a California address through year-end. California may still view the person as a resident by default, regardless of federal nonresident status from October onward.

Exit planning steps that protect global movers

Tax attorneys describe “exit planning” as a checklist, not a single act. The goal is to shift your domicile and prove it with records. Done right, you reduce or eliminate exposure to state tax on post-departure income.

Before you leave

• End your lease or sell your home—do this before departure or as close as possible.
• Surrender your state driver’s license or switch to a foreign ID; do not renew online with a California address.
• Move your payroll and tax mailing address to your foreign residence; update HR and banks.
• Close or downsize domestic financial ties—consider moving or closing primary bank and brokerage accounts that anchor you in-state.
• Document your foreign home: lease, employment contract, school enrollment for children, and utility bills in your name.
• Stop voting in the state. Citizens should update voter registration; noncitizens must never be on voter rolls.

In the year you move

• Track days in each state and country—keep flight records and calendars.
• File a part-year resident return if required, to split pre- and post-move income.
• Report in-state income as a nonresident if you keep rental property; consider professional property management to weaken domicile ties.
• Prepare for questions—states may request leases, licenses, travel logs, and foreign tax records.

After you settle abroad

• Maintain foreign residency evidence each year: renewed lease, work contracts, tax assessments, utility bills.
• Avoid frequent, lengthy returns to your former state, especially during the first year after departure.
• Consult cross-border advisors who understand both state rules and treaty relief.

Special considerations for families and businesses

• Families: If one spouse remains in California for work or a child stays enrolled in local school, the state may argue the family home remains in California. Moving the family unit, household goods, and closing school ties prior to departure carry weight.
• Businesses and non-wage income: A California LLC, a closely held startup headquartered in the state, or short-term consulting contracts with California clients can support a finding of ongoing ties. Where possible, restructure or pause these activities until your new domicile is established and documented.
• Renters: Keeping a low-cost apartment “to keep a foot in the door” is one of the strongest pro-residency signals. If you must keep property, shift to arm’s-length rental with a long-term tenant and professional management rather than leaving it vacant for visits.

Filing and documentation: don’t ignore the tax return

One point often overlooked: filing nothing can make things worse. If you depart mid-year and do not file a part-year return, the state may assume full-year residency.

Filing the correct return with a brief statement of facts—move date, lease termination, license surrender, new foreign address—puts your position on record. Keep copies in case of a future residency audit.

Consequences for immigration and future U.S. dealings

Unpaid state tax can lead to liens, collection action, or garnishment, which may complicate background checks and future visa filings. For workers hoping to re-enter the United States for a new assignment, clean tax compliance helps avoid delays, especially when employers run due diligence before sponsorship.

Practical takeaway and final warning

• States look at the full picture; a quick driver’s license change or a single foreign lease alone usually does not solve the problem.
• The more ties you cut—and the more ties you build abroad—the stronger your case.
• Exit planning is about consistency: your housing, family location, ID documents, finances, and travel pattern should all tell the same story.

VisaVerge.com reports that thousands of Indian tech families depart coastal states each year and face double tax risk when U.S. state claims overlap with Indian residency taxes. While India and the U.S. have a tax treaty, state income tax is not always covered the same way as federal tax, and credits may not fully erase the bill. That reality makes front-end planning far more effective than back-end appeals.

The bottom line for mobile workers and their employers: treat state tax residency, domicile, and exit planning with the same care you give to visas and international payroll. A planned exit can save five or even six figures in state tax and reduce the risk of a residency audit years later.