Tax Planning For Americans Abroad

Sexy Tax Talk

The foreign-earned-income exclusion…foreign tax credits…investment rental write-offs…deductible travel expense…mortgage 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 each year. We have an additional 60 days (until June 15) to get our returns to Uncle Sam.

Nevertheless, Lief applied for a six-month extension for our U.S. tax filing this year. Meaning that, for the past two weeks, our pillow talk has had a lot more to do with foreign-earned-income analysis than…well, than with anything else…

Lief reports that our returns are, finally, nearly finalized. And he offers the following 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 14 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 an American citizen living and working abroad who qualifies for the foreign-earned-income exclusion, his first 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.

I’m lucky. I happen to be married to the most international tax-savvy guy I know.

Kathleen Peddicord

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