Tax Issues When Retiring Abroad

If you are planning on retiring overseas, then it is important you understand tax laws. A lot of retirees in the United States make the mistake of believing they no longer need to pay taxes if they live in another country.

Every country has different tax laws and in the United States, whether you owe taxes is determined by your citizenship not your residency. As a result, you must file your taxes every year, even if your primary residence is no longer in the country. Even if you renounce your citizenship, you will still have to pay a final expatriation tax.

If you retain your citizenship, then the process of paying your taxes is very similar to the process you followed while you lived in the United States. You are still eligible for the same types of deductions under U.S. tax laws. However, there may be additional deductions available depending on where you are living and whether you are earning additional income while overseas.

Earning Foreign Income

If you started to save for retirement late, then you may consider earning an income abroad. One of the most confusing aspects of filing United States taxes from another country has to do with the different types of currency. You must report any worldwide income you have made over the year, whether it was in the United States or the country where you reside. When reporting your worldwide income, you are required to convert your total income into U.S. dollars. In addition, any payments you make must also be in U.S. dollars.

Foreign Tax Credit and Earned Income Exclusion

Another one of the complications with tax laws when you retire overseas is owing taxes to two different countries. If you have investments from different countries, then the tax laws will ultimately vary depending on the country where you decide to retire. However, for your U.S. taxes, you may be able to apply for a foreign tax credit. A foreign tax credit applies for any taxpayer who owes taxes in both the United States and another country.

How much your foreign tax credit is worth depends on a number of factors, including how much you owe in taxes, how much you made over the year and how much of your income was made in a foreign country. Your foreign tax credit can never exceed the total of your U.S. tax liability. If you end up hitting the limit for your foreign tax credit, then you may be able to carry the remaining credit to future tax years.

The Foreign Earned Income Exclusion applies to any retiree who takes on either a full- or part-time job while living overseas. The Foreign Earned Income Exclusion is the amount of foreign income you are required to report but not pay taxes on. The Foreign Earned Income Exclusion changes annually based on inflation. As of writing, the current exclusion for 2018 is $104,100 dollars. As long as you do not make more than $104,100 dollars while working overseas, you will not be required to pay any extra United States income tax.

Social Security and Retirement Income

In most situations, your retirement income will not be taxed by another country. However, you should always consult with a local tax attorney, as every country follows different tax laws. If the only income you receive is from Social Security, then you may not be required to pay any U.S. taxes. When you receive your benefits, you will receive Form SSA-1099, which contains your Social Security benefits statement. Your benefit statement will inform you how much you receive from Social Security as well as whether you will have to pay any U.S. taxes. Depending on your income, you may not even be required to file a federal income tax return. If it is your first year filing taxes abroad, then you are strongly encouraged to speak with a tax expert even if you are confident you do not owe any U.S. taxes.

Payments That Do Not Qualify as Foreign Income

There are some types of payments that may have been earned outside of the United States but do not technically qualify as foreign income for tax purposes. The following types of payment are not eligible for any foreign tax reductions:

 

  • Any payments received as a military or civilian employee of the U.S. Government or any U.S. agencies
  • Any payments received for services conducted in international waters since international waters are not considered a foreign country
  • Payments received from the United States after the end of the tax year in which you moved to a foreign country
  • Pension or annuity payments, which includes any social security benefits you receive

Expatriation Tax

The Expatriation Tax applies to anyone who decides to retire outside of the United States and denounces his or her United States citizenship. The Expatriation Tax is sometimes referred to as the exit tax or the final tax. Overall, the tax is very similar to an estate tax. How much you owe on your Expatriation Tax is determined by totaling how much all of your assets are worth. If your net worth is over two million dollars or more, then you are required to pay an expatriation tax. Additionally, if your annual net income tax for the last five years has been over $160,000 dollars, then you are always required to pay an exit tax.

All of your assets from the day before you are expatriated are included in this calculation. Once your total assets are calculated, you must pay a tax based on 23.8 percent of the total asset value. As of writing, there has been talk of increasing the total amount you pay to 30 percent of your total asset value, but so far this has not been passed into law.

If you are married and retiring overseas, then you and your spouse calculate your assets separately. If your assets are in both of your names, then you both apply the value to your total assets. If one spouse owns more assets than the other, then he or she may be able to gift some of his or her assets to his or her spouse to fall under the two million dollar limit, thereby bypassing the Expatriation Tax.

 

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