International Taxation

Sexy Tax Talk

Oct. 13, 2010, Panama City, Panama: Tax advice for the American abroad.

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Dear Live and Invest Overseas Reader,

The foreign-earned-income exclusion...foreign tax credits...investment rental write-offs...deductible travel expense...

The talk in our offices these days is all to do with taxes.

As we’re American citizens living abroad (that is, Americans legally resident elsewhere), our taxes needn't be postmarked by April 15. We have an additional 60 days (until June 15) to get our returns to Uncle Sam each year.

Nevertheless, Lief applied for a six-month extension for our U.S. tax filing this year. We weren't the only non-resident Americans to ask for a little extra time to get our returns to the IRS. Not only Lief, but friend and international tax attorney Chris Rusch, who shares office space with us here in Panama City, have been frantically filling out IRS forms for the past two weeks, Lief for us personally and Chris for his far-flung clients who, like us, are now up against their final filing deadlines.

Lief reports that our returns are nearly finalized...with two days to spare. And he offers these tips for other Americans abroad keen to keep compliant but eager, as well, to pay no more in U.S. tax each year than absolutely necessary...

This is our list of six things we wish someone had told us about international tax planning and asset protection before we set off on our living and investing overseas adventures 13 years ago:

First, maybe you don't need to do anything. Asset protection isn't an issue until you've got assets enough to warrant the investment of time and money to figure out how to protect them.

In some jurisdictions, for example, yes, you're wise to hold property in a local or an offshore corporation...but not all. Before you do anything, make sure you understand why you're doing it and the real benefit.

Second, whatever you do, it shouldn't cost you tens of thousands of dollars. OK, maybe if you're Bill Gates or Warren Buffet, a big investment in managing your tax and asset issues is warranted. For you and me, it's not.

Third, the foreign-earned-income exclusion may be the beginning and the end of the tax planning you require. My young marketing manager Harry, for example, is sitting pretty from a tax point of view...and he got to this point without spending a single dollar on tax advice. As a American citizen living and working abroad who qualifies for the foreign-earned-income exclusion, his first US$91,400 (that’s the 2009 figure; it’s US$91,500 for 2010) of earned income is tax-free in the States, which means that, for the foreseeable future, Harry's annual tax bill to Uncle Sam will be exactly zero.

Fourth, when it comes to purchasing and holding real estate overseas, remember these two things: First, the jurisdiction is the key; second, as a result, no attorney in your home country is going to be able to help you figure out what to do. You need a local attorney, experienced at working with foreign buyers, to help you determine how to purchase and how to hold (in a local corporation, in a foreign corporation, in your own name, in a trust, etc.).

Fifth, when it comes to dealing with the tax issues in any new jurisdiction where you take up residence, the key is to research, plan, and take action before taking up residence. Certain options for mitigating your local tax bill can be taken off the table once you've taken a local address. Again, you need local legal advice.

Sixth, you can avoid any local tax issues by being only part-time resident. The particulars differ jurisdiction to jurisdiction, but, generally, spend fewer than six months in a place, and you can't be considered full-time resident for tax purposes.

There are exceptions, so, again, get advice.

That's where a guy like Chris Rusch comes in.

First, Chris doesn't over-complicate. He simplifies. He takes the most straightforward approach, issue by issue.

Second, Chris doesn't bill by the hour or the page (as most all other international tax attorneys I know do). You explain to him what you want to do. He lets you know if, in fact, what you think you want to do makes any sense. Maybe you don't need to do anything...

But, if you do, Chris quotes you a flat fee for the project. You can send him as many e-mails as you like, ask him as many questions as you want. You'll at least have a shot at understanding what, exactly, you're doing, first, because you won't be paying by the hour for the effort and, second, because Chris won't be over-complicating the effort in the first place.

In nearly 25 years covering this beat...and 13 years of filing tax returns as an American abroad...I've met no other tax advisor who compares.

In other words, Chris is the next best thing to an international tax-savvy husband. And, if I didn't have Lief, Chris'd be the guy I'd turn to for help.

Kathleen Peddicord

P.S. We'll take up this discussion of how to address your tax issues as an expat or a retiree abroad, be you American or not, during our upcoming Emergency Offshore Summit, scheduled for Dec. 2-3 in Panama City.

Of course, Chris Rusch, our favorite international tax expert, will be on hand, chief among the team of experts we're convening for this timely event. Full details of the program we're planning are here.

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