Most countries are relatively tax-friendly when it comes to retirees. That is to say, a foreign resident’s pension or Social Security income is often not taxed locally. Remember, though, that, if you’re an American, you could owe tax in the United States on your retirement pension income; that tax obligation must always be considered as separate from and in addition to any local tax burden in your new jurisdiction.
In other words, if you’re an American retired to Panama, while you’ll owe no tax on your pension income in Panama, you could owe tax on it in the United States.
The fundamental point, though, is that, if this is the only income you’ll have as a retiree overseas, then tax planning isn’t an issue for you. For you, one jurisdiction is as tax-efficient as another.
Things get more complicated when you have passive (investment) or earned (wages or business, including self-employment) income to report. The first thing to understand when considering your tax burden as a retiree overseas is that tax rules vary greatly jurisdiction to jurisdiction and, as well, depending on your nationality, your residency status, what kind of income you’re earning, and where that income is sourced.
Unfortunately, however, one more time, as an American abroad, no matter where you go, you’ll always carry your U.S. tax obligation. As long as you carry a blue passport with an eagle on the cover (or, in fact, a U.S. green card), you must file a U.S. tax return every year. This is not to say you will necessarily owe tax. Careful planning often can reduce or even eliminate your U.S. tax on earned income. Still, the filing requirement remains.
Some countries tax foreign residents on what’s called a “remittance basis,” meaning they expect their share of any money you bring (remit) into the country. This can work to your advantage if you earn your money outside the country and are able to live on little. In this case, you could earn millions of dollars a year, from either passive or earned income, but, as long as you kept most of your millions outside the jurisdiction where you’re residing, you wouldn’t owe any tax on it locally.
Again, as an American, you’d still have a tax obligation to Uncle Sam, but that’s a separate matter. To the tax collector of the country where you’re living, you’d owe tax only on the money you brought into that country each year to cover your living expenses.
Some countries tax foreign residents only on income earned locally. In this case, you could not only earn millions outside the country, you could even bring your millions into the country to spend as you like (theoretically speaking). As long as you didn’t earn the money locally, the local tax collector would have no claim. This is as good as it gets from a tax-planning point of view.
Four key jurisdictions where this is the case are Panama, Belize, Uruguay, and Malaysia. As a foreign resident in any of these jurisdictions, you won’t pay taxes on your pension income. In addition, in these four countries, neither will you pay income tax on any income from outside the country, be it passive or earned. If you have an investment account in the United States that earns you US$10,000 a year in interest, you’ll pay no tax on that income to these countries’ tax collectors.
Thinking through the implications further, the approach to taxation in these countries means that, working as a consultant in one of them, with clients outside the country, you could pay zero local tax.
A German fellow I met several years ago had set himself up in Kuala Lumpur, Malaysia. He was an engineering consultant whose clients were various companies in the Middle East. All his income was earned outside Malaysia, meaning he was liable for no income tax in the country. As he was German, living outside Germany, neither did he owe income tax in that country. He was living and working completely income tax-free.
As a retiree overseas, your tax issues can be very straightforward; still, income tax, of course, is not the only tax you’ll have to contend with. Another important tax to consider as an expat is import duty for your household goods and personal belongings. Most countries allow you to bring your used household goods into the country with you duty-free when you take up residence, and some allow you to bring new goods and a car tax-free, as well. Again, the four jurisdictions I’m highlighting here come out tops in this regard. Belize, Malaysia, Panama, and Uruguay all allow you to bring new and used belongings and a car with you when you relocate with a retiree visa.
Tax-friendly Pick #1: Belize
Research Belize tax rates, and you’ll find that they’re high (at least after you hit a certain level of income)…for Belizean citizens living in the country. Don’t be confused. Tax rates in a country for citizens of that country apply only to citizens of that country. Unless you acquire a Belize passport, these rules don’t apply to you.
As a non-Belizean living in Belize, you’re taxed only on income earned in Belize. Therefore, as a foreign resident in this country, you have a local tax liability only if you run a business or take a job. Two other critical taxes to consider when choosing a retirement jurisdiction are capital gains and inheritance taxes. Belize imposes neither.
Furthermore, as I’ve explained, as a resident retiree in Belize, you’re welcome to import personal belongings, household goods, a car, and even an airplane tax-free.
Tax-friendly Pick #2: Panama
Panama doesn’t differentiate between citizens and non-citizens for income tax purposes. As a resident, Panamanian or not, you pay taxes only on income derived directly from within Panama. This means that, as a resident retiree in this country, you owe zero tax on any income (pension, earned, or passive) from outside Panama.
Panama has a top marginal tax bracket of 30% for income earned in Panama. Businesses pay a flat tax of 30% on net profits. Capital gains are taxed at 10% (again, this applies only to gains realized in Panama).
Tax-friendly Pick #3: Uruguay
Uruguay also taxes residents only on income generated in the country. Individual income generated in Uruguay is taxed at rates starting at 10% up to a top marginal rate of 25%. That is to say, while income earned in Uruguay is taxed, it is taxed at a relatively low rate.
One downside to Uruguay is that the country imposes a wealth tax on all assets within Uruguay. This is something to be aware of if you decide to invest in property in this country. The wealth tax rate is low, starting at .7% and topping out at 2.5%. Exemptions apply, so the total actual tax should be minimal unless you buy an expensive piece of real estate. Individuals pay a 12% tax on capital gains in the country.
Tax-friendly Pick #4: Malaysia
As a resident, you are taxed only on income derived from within Malaysia, meaning that, even income you remit to Malaysia is not taxed as long as it was earned outside the country. Income earned in Malaysia is taxed at marginal rates from 0% to 27%. The country imposes no wealth tax and no property tax. Capital gains are taxed on a sliding scale that is reduced to zero after you’ve held a piece of real estate for five years or longer.
Editor’s Note: If you’re an American, you have taxes on your mind this week, as tomorrow, April 15, is Tax Day, the date by which your annual tax return must be filed with the IRS.
Unless, that is, you’re an American abroad. If you’re not physically present in the United States on April 15, you enjoy an automatic filing deadline extension. The non-resident American needn’t file his return until June. 15.
More on international tax issues tomorrow, from the savviest international tax expert I know…