Now let's turn our attention to state tax issues. As you know, this is completely separate from the federal tax that we've been discussing up to this point. And this is, of course, going to differ from individual to individual, depending on what state you're from. So in this section, we'll look at a high level at what are the general state tax issues you should be aware of, and what to do depending on what state you're from. So the reality is, of course, all 50 states are different, and they can vary quite significantly from federal tax treatment. So I've divided this a little bit tongue in cheek into what are the good, the bad and the ugly when it comes to state tax.

We'll start with the good states. What are the states with no income tax whatsoever there are seven states with no income tax requirements at all. And then there are two additional states that tax interest and dividends of residents only. But they're generally, you know, pretty low effort when it comes to what you need to do. So the good states, some of them, you may be aware of others not. But if you're from one of these states, you probably know you don't file a separate state tax return.

So that's Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming. And then if you're from New Hampshire or Tennessee, you would file and pay tax only if you had interest or dividends, and then only if you're a resident of one of those states. So once you move out of those states and you cease being a resident, then you won't have any state income tax requirements either. So these are the easy states. There's not that much we need to discuss. Because if you're from one of these, then you only have to worry about the federal tax.

What are the bad states? I say bad because it's not really bad, it's just that it means you have to do something a little bit additional. In other words, these are states that do have a state income tax, but generally speaking, they allow you to what's called break your state tax residency. And this is almost every other state. So in general, what you would do if you're not from one of those nine states that we've just discussed, is in your year that you leave that state, you file what's called a part year resident return, showing your departure date. And then in general, unless you have any other income source to that state.

In subsequent years, you wouldn't file a tax return because you would be a non resident. So in most other states, if you qualify for the foreign earned income exclusion, generally speaking, you will be able to break your tax residency in most of these other states. Sometimes you just have to qualify certain tests like spending a certain number of days outside of the state etc. What are the ugly the states that you really need to watch out for for tax purposes? Generally speaking, there are four states that make it really hard to break your state tax residency. And there's one state in particular, that is a real challenge for us to work with, let's say.

So, the states that are hard to break your tax residency are New Mexico, South Carolina, Virginia and California. But of those four, three of them, at least do accept the foreign earned income exclusion. So it's possible that even if you may have a continuing filing requirement to one of those states, you may not actually pay any tax if all of your income is excluded under FDI eat. However, there's one state that just is a constant source of headaches. To be honest for expats and digital nomads, and that is the wonderful sunny state of California. California doesn't accept the foreign earned income exclusion.

California doesn't honor international tax treaties. And California can just make your life a little bit miserable, to be honest. So if you're from California, one thing you really need to do is talk to someone about your state residency and make a plan for it. You can't ignore this, you do have to really make a strategic plan. And that plan needs to be in line with someone who knows what they're talking about in terms of California State residency. Oftentimes, a lot of digital nomads would be well served by moving to another state before leaving the US because that can make it easier for the California Franchise Tax Board to accept the fact that you're breaking up with them.

And a lot of times that may include for example, changing your driver's license or voter register to another state before leaving the US altogether. So the bottom line here is, if you're from California, you have some additional legwork to do. And please bring that up in the consultation and we'll discuss it in detail