Tax Considerations of Living Abroad

By Lee Sherman

When it comes time for retirement, many U.S. citizens dream of moving to a place where their hard-earned cash can go further. Emerging economies in places like Southeast Asia or Latin America have particular appeal. The cost of living is much lower, the weather can be warmer and the lifestyle is more relaxed. And don’t worry, you’ll still be able to use your iPhone and find a WiFi connection most everywhere you go. Sounds like the perfect place to enjoy your retirement, right?

But before you pack your bags for your permanent vacation, keep in mind that as long as you remain a U.S. citizen you will still have to pay U.S taxes. There’s no escaping the reach of the taxman. According to the Internal Revenue Service (IRS), “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”

Tax Strategies for Expats

A commonly used way to reduce your taxes is what’s called the foreign earned income exclusion (FEIE). You are allowed to exclude up to $102,100 of income earned in a foreign country from your U.S. income tax. Along with this, it might be possible to exclude the cost of foreign housing and or meals provided by your employer. If your income is higher than the FEIE, you should consider claiming Foreign Tax Credit (FTC). This is another type of credit provided by the U.S. government intended to offset the taxes you are required to pay in your country of residence so that you avoid double taxation.

The tax considerations of living abroad can be complicated so we recommend consulting with a financial advisor. Note that you are required to file a U.S. tax return by April 15th as you’d expect but whether you have to actually pay any taxes is dependent on many factors that are complicated by your expatriate status. You might be surprised to learn that most expats don’t owe any U.S. taxes and in fact, the U.S. government has put many a number of exclusions and credits in place to avoid you from being taxed twice (once by the U.S. and once by the local government).

Let’s take Hong Kong as an example. The former British colony’s economy is strong, English is widely spoken, and in most respects, living there is similar to living in a big American city like New York or Chicago.

According to Tariq Dennison CFP CM, Managing Partner, GFM Asset Management, who is a subscribing advisor to MyPerfectFinancialAdvisor the publisher of this blog, there are several strategies U.S. taxpayers in Hong Kong can use to legally reduce their U.S. taxes, including these:

● Contributing to an IRA, which many overseas Americans can but don’t do

● Contributing to an HSA health savings account

● Using tax-loss harvesting or tax-exempt bond strategies

● Having their employer set up a 401(k) or other U.S. qualified retirement plan

● Having their employer set up a 409A non-qualified deferred compensation plan

● Investing through 529 college savings or other sheltered plans

● Setting up a charitable remainder or other tax-favored U.S. trust structures

While these tax strategies aren’t exclusive to Americans living abroad, it’s important to note that taking advantage of them provides you with additional layers of protection when living somewhere where the economy might be more volatile. Living abroad appeals to many but, if you’re a U.S citizen and you’re still receiving income, be aware that you’ll still have to pay U.S. income taxes. The good news is that the IRS has taken steps to prevent you from double taxation in the form of the FEIE and FTC.

Lee Sherman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.

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