Can you eliminate your U.S. tax burden by retiring overseas?
No, you can’t. It’s not that simple, and you shouldn’t believe anyone who tells you otherwise.
If you’re simply and truly “retiring” overseas and intend to live on Social Security or other retirement income alone, your move to a new country (any new country) should be a tax-neutral event. You won’t be able to walk away from any U.S. tax obligations; on the other hand, neither will you acquire any new or additional U.S. tax obligations.
Many countries you’d consider for retiring overseas don’t tax Social Security or pension income, so, again, if this is the extent of your retirement nest egg, you’ve got no tax issue to consider and no retirement tax planning is called for.
If, however, you’ll be bringing anything beyond Social Security or pension income with you when you relocate overseas, then you need to address the question of taxation. In fact, you need to address it on two fronts—both back home and in your new jurisdiction of residence.
Note that I’m assuming full-time residence; if you’re planning to retire overseas only part-time (fewer than six months a year in another country), then, again, you’re off the hook, because, again, no tax planning is necessary.
If, though, you intend to relocate full-time, and you’ll be bringing more than Social Security or pension income with you, then new tax issues can develop, depending on where your money will be coming from—that is, whether it’s earned income or investment income.
Earned income is just that—money you earn. Wages you receive for services you perform. The good news about earned income for the American abroad is that the first US$100,800 (for 2015; the amount is adjusted upwards annually) can be tax-free if you qualify for what’s called the Foreign Earned Income Exclusion (FEIE). This is the amount that the IRS allows you to earn overseas before incurring any U.S. tax liability.
Note that the FEIE applies to earned income only. It’s no help when it comes to investment, dividend, interest, or capital gain income.
Bottom line, and in layman’s terms, here is what you should be aware of as you address your retire-overseas tax-planning agenda. These are six things I wish someone had told me about international tax planning before I made my first international move:
1. Maybe you don’t need to do anything. As I’ve mentioned, a move overseas is often a tax-neutral event for someone with only retirement (that is, pension or Social Security) income.
2. Whatever you do, it shouldn’t cost you tens of thousands of dollars. OK, maybe if you’re Bill Gates or Warren Buffett, a big investment in managing your tax issues is warranted. But for us Average Joes, it’s not.
3. The Foreign Earned Income Exclusion may be the beginning and the end of the tax planning you require, and this comes into play only if you have earned income.
4. No U.S. tax accountant is going to be able to help you figure out what to do in your new country of residence. You need a local tax advisor in your new country of residence, experienced at working with foreign residents, to help you determine your local tax liabilities and obligations. Sometimes, for example, depending on your situation (if you intend to run a local business in retirement, as a hobby or for the cash flow), a local tax filing may be required even if no local tax is due.
5. No matter where you eventually decide to relocate overseas, the key to successful tax planning is to carry it out before taking up residence. Certain options for mitigating your local tax bill can come off the table once you’ve taken a local address. Again, you need local tax advice.
6. You can avoid any local tax issues altogether by being only a part-time resident. The particulars differ from country to country, but, generally, if you spend fewer than six months in a place, you are not considered a full-time resident for tax purposes. There are exceptions, so, again, you need personal advice.