With vaccination progress forcing back COVID-19 pandemic restrictions, many are eager to travel again. And, with the work-from-home environment becoming a common permanent option, these journeys abroad may last longer than a week or two vacation.
However, if you’re considering a move overseas, even for just a few months, you need to be mindful of some major potential pitfalls – a seemingly simple oversight can cost you and your family thousands.
Before you stamp your passport, consider the following:
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The U.S. Global Tax Net
Importantly, you may still owe U.S. income taxes even if you live and work abroad. The U.S. is one of just two countries in the world that taxes its citizens regardless of residence (the other is Eritrea), and it is also the only country to tax its permanent residents if they move abroad without relinquishing their green cards.
You may have heard about the Foreign Tax Credit or the Foreign Earned Income Exclusion. With the Foreign Tax Credit, you can reduce your U.S. tax bill dollar-for-dollar for the foreign taxes paid, although not all taxes paid qualify. With the Foreign Earned Income Exclusion, you may be able to exclude up to $108,700 of your foreign earnings in 2021. Yes, these and other strategies can lower or eliminate your U.S. tax bill; however, even if you move to a country with lower taxes, you may still owe huge tax bills to the U.S. Forgot to withhold? When you file your return, you’ll pay a single giant lump sum plus penalties and interest.
The same issue can apply with state taxes. Each state has its own definition of residency. Some, like California, may still consider you a resident even if you live and work overseas – meaning you still owe state taxes, and as with federal taxes, a failure to pay can cost you additional penalties and interest.
Further, these taxes are owed not only on your income, but also on any income-generating investments or property. For example, if you buy property overseas and rent it out, you are still required to pay U.S. taxes, even if you purchased the property using foreign income. If you don’t disclose overseas income and assets, then there will be more penalties, which can go up to 50% of the asset’s value.
Insurance Issues Across Borders
Unfortunately, your insurance policies may not pay out if you live abroad. This is particularly an issue when it comes to disability insurance policies. To maintain payouts, you typically need a U.S. doctor to confirm that you're still disabled, so losing access to that doctor can disqualify you for those benefits.
It is also common for health insurance policies to become invalid if overseas, so if you are permanently living abroad, it’s crucial to obtain new coverage, even in countries with socialized health care – those services are only free to their citizens and legal permanent residents. Consider dedicated overseas insurance policies, even if you’re just traveling for an extended period of time. Paying those premiums, which are relatively inexpensive, can help you avoid enormous medical bills. It is also advisable to ensure your policy includes evacuation, which covers expenses for you to be brought back to the U.S. in the event you need additional medical care.
Saving for Retirement
If you work in the U.S., you are probably contributing to a 401(k) or IRA – but overseas, these accounts will generally lose all their tax advantages. Gains in usually tax-free Roth IRAs are especially a problem, as most countries consider those gains taxable income. For U.S. expats, this creates a double whammy: those gains are locked in your IRA, but you still owe taxes on them.
What if you stop contributing to your U.S. retirement accounts and start contributing to host-country accounts instead? Often, you get the same problem in reverse. While you won’t owe taxes in your host country, the U.S. will tax any gains in those foreign accounts. Additionally, if your employer is matching any of your contributions, the U.S. may tax those matches, too. Ultimately, there are many factors to take into consideration when deciding whether to contribute to a qualified account overseas, including how much time you plan to spend abroad and where you ultimately plan to retire. It’s beneficial to research any bilateral tax treaties that can provide you with clear guidance.
A similar concern also applies to Social Security benefits. A handful of countries have “totalization agreements” with the U.S. that allow American expats to continue to qualify for Social Security while working abroad, and vice versa – if you choose to retire abroad, those countries will allow you to collect from their version of Social Security. However, this isn’t an option in the majority of countries, in which you will inevitably fail to qualify for both U.S. Social Security and foreign benefits as well.
In Conclusion
It can be a rewarding experience to travel and work abroad – especially if you’re a remote worker. However, without careful planning, it’s easy to make costly mistakes.
Many of these issues could impact folks who spend just a few months abroad, even if they’re not moving permanently. For instance, having the wrong health insurance could affect you immediately. If you’re working remotely, you will be subject to local taxes and to U.S. taxes (unless you are working remotely on a tourist visa – illegally – which could come with different consequences if your host country finds out). While these shorter-term travelers are less likely to run into retirement account issues, they could still run into trouble depending on how involved they get into the host country’s financial system (e.g., getting a local bank account, claiming tax residency, etc.)
Speaking with a financial planner who is knowledgeable in the financial systems of both the home and host country can help you avoid any setbacks. Some additional resources to consider while looking for a financial planner include the Global Financial Planning Institute (www.gfp.institute), the Society of Trust and Estate Practitioners (www.step.org) and the Association of International Certified Public Accountants (www.aicpa-cima.com).
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