The allure of living abroad can be irresistible — especially in one’s later years. In fact, hundreds of thousands of Americans choose to spend their retirements relaxing on sandy beaches, eating exotic food and learning a foreign language.
If you have similar aspirations, relocating to another country is certainly possible. Though to achieve and maintain the standard of living you desire, it is imperative to understand the tax implications of moving overseas (or even south of the border).
Below is a brief tax guide designed for U.S. expats retiring abroad.
Why Nearly Every Retired US Citizen Living Abroad Pays Taxes
Whereas many countries assess annual taxes based on residency, U.S. tax law is based on citizenship. This means nearly every American around the globe is required to file federal taxes annually if their worldwide income exceeds $12,000 ($400 if self-employed).
It doesn’t matter where you live or whether you already pay taxes in your host country. Nothing short of revoking your U.S. citizenship will shield you from having to report your global income to the IRS every year. This includes everything from pension distributions to stock dividends to rental payments if you own foreign property. Even bank account interest counts. Moreover, if you still own property or other holdings in the U.S., you may also be required to report state taxes — depending on local filing requirements in that jurisdiction.
What Taxes Do I Have to Pay From Overseas?
Because the IRS doesn’t care where you live, you’ll need to report the exact same details you’re already accustomed to filing as an American living in the U.S. What complicates the process is that moving abroad means you’re now technically living in two tax systems. Living overseas also increases the probability of owning foreign bank accounts, property or other assets that you wouldn’t necessarily have (or need to report) if living stateside.
As a result, expect to file more paperwork overall. This makes it all the more important that you keep paper and electronic copies of every receipt, deed, bank statement and financial report collected throughout the year.
Will I Have to Pay Taxes Twice (at Home and Abroad)?
Although the IRS requires all Americans to report their global income, the U.S. has bilateral tax agreements with numerous countries designed to prevent double taxation. Thanks to the U.S. Foreign Tax Credit, any income taxes paid overseas reduces your U.S. liability by an equivalent dollar amount. You literally receive “credits” that you can apply to your next IRS tax bill.
How Does Social Security Work If I Move Abroad?
In most countries around the world, the IRS will tax Social Security payments — just as it normally does in the U.S. Exceptions to this rule include Israel, Ireland, Egypt, Germany and Canada .
How Will My Expat Pension Work Overseas?
Because most U.S. pensions and retirement plans are funded with “pretax” income, all distributions would be taxed normally (no matter where you live). Just keep in mind that if you own an IRA, you must begin taking out required minimum distributions (RMD) in the year you turn 70.5. Failure to withdraw this mandatory minimum could result in hefty excise penalties.
What Are Financial Reporting Requirements for Expatriate Retirement?
Many of the IRS filing forms you’ve used in the past will still apply when moving abroad. Though you may also need to include additional forms, such as:
- IRS Form 1116, which is what you’ll use to claim the U.S. Foreign Tax Credit discussed earlier
- FinCEN Form 114, which is what you’ll need to complete your Foreign Bank Account Report (FBAR) if you have any overseas accounts exceeding $10,000
- IRS Form 8938, which is similar to a Foreign Bank Account Report. The main difference is that it is designed for financial assets exceeding $200,000
- IRS Form 2555, which allows consultants, freelancers and other self-employed expats to claim a Foreign Earned Income Exclusion for any income earned abroad (up to $100,000 annually )
Navigating the U.S. tax code isn’t how most retirees envision spending their golden years. After all, the paperwork is confusing, the rules and exceptions are overwhelming, and the potential consequences of getting it wrong can be catastrophic.
Fortunately, you don’t have to go through all this alone.
At Expat CPA, we specialize in professional tax services for American retirees living all around the globe. Our expert team of certified public accountants is ready to guide you through the entire process, seeing that you qualify for every deduction and credit possible — while remaining compliant with the reporting requirements of all relevant foreign, state and federal jurisdictions. This includes helping you navigate the FATCA reporting the U.S. Treasury now uses to track (and punish) tax evaders.
If you’re looking to minimize tax liability while staying on the good side of the law, schedule a free consultation with one of our certified tax experts today.