Important Considerations Before Moving Overseas
Retiring abroad can be both exciting and overwhelming. While living overseas brings new adventures and new experiences, it also brings complex financial challenges. Before you set off to your dream retirement destination, review our expat checklist and take some time to implement the following financial strategies.
#1 – Take steps to minimize your taxes.
Americans living abroad face unique tax challenges. The United States taxes on the basis of citizenship, which means U.S. citizens are required to file U.S. income taxes regardless of where they live. Because most other countries assess taxes based on residence, American expats are typically subject to taxes imposed by both the United States and their current country.
Fortunately, there are steps you can take to mitigate the impact of dual taxation, including the following.
- Apply the foreign earned income exclusion (FEIE).
The FEIE is an income tax exclusion for U.S. citizens and green card holders who live and work in foreign countries. The exclusion applies only to foreign earned income, not passive income from investments, rental sources, annuities or pensions. To qualify, you must have income that you earned while living in a foreign country, regardless of where the income came from. For example, you may qualify for the FEIE if you work for a U.S.-based employer but are performing services for that employer while living outside of the United States. - Apply tax credits for taxes paid in your foreign country of residence.
The United States offers U.S. expats dollar-for-dollar credits on the taxes they pay on foreign sourced income. You cannot use credits for income you have already excluded, nor should you switch between using the foreign earned income exclusion and the foreign tax credit. If you start and then stop using the foreign earned income exclusion, you must wait five years or apply to the IRS to begin using it again. - Understand any existing tax treaties.
Tax treaties are agreements between the United States and foreign countries that help coordinate taxation on income that may occur in both countries. The United States has tax treaties with more than 60 countries. It’s important to understand the specific provisions of any tax treaties that exist between your current country of residence and the United States in order to ensure you’re making the most of any applicable exemptions.For example, if you’re a retiree living abroad, it’s very important to understand how your current country of residence taxes distributions from your 401k, Roth accounts, pension plans and Social Security. Work with a qualified tax advisor to help ensure you’re minimizing your tax exposure based on the provisions of the tax treaty.
It’s also important to be aware of the following special tax considerations when planning for your move abroad.
- Tax treaties typically don’t recognize the tax-exempt status of Roth accounts. This means you may be subject to double taxation on any Roth withdrawals you make while living overseas. If you plan to use Roth accounts to fund a portion of your retirement, consider making withdrawals prior to moving abroad, or delay withdrawals from these accounts until you return as a resident to the United States.
- Health savings accounts (HSAs) aren’t covered by any tax treaty. That means if you reside in a country that taxes worldwide income, any HSA withdrawals will be fully taxable.
- Some countries penalize U.S. mutual funds. Make sure you work with an advisor who understands how your country of residence taxes U.S. mutual funds, and make any necessary changes to your investment portfolio before you move abroad.
- You may be subject to state taxes after you move abroad. Before leaving the United States, you may need to terminate your state domicile or residency to avoid state tax liabilities.
#2 – Review and modify your estate plan.
Your U.S.-based estate plan may not hold up well once you move abroad. Work with a qualified estate planning attorney to create an estate plan that meets your needs while living overseas. Consider the following:
- Wills – A U.S.-based will may not be recognized by your new country of residence. This can present challenges for your heirs should you pass away while living overseas. Depending on local tax laws, you may need to create a “situs” will to govern the distribution of property held overseas. The situs will should be designed to work alongside your primary will to cover all of your assets.
As an alternative to creating two separate wills, you may wish to consider implementing a multi-jurisdictional will to cover your assets held in multiple countries. Be sure to work with attorneys who have experience in both countries in order to ensure the provisions of the will are acceptable in all relevant jurisdictions.
- Trusts – U.S.-based trusts typically don’t operate as intended once the tax and probate laws of another country come into play. That’s why it’s important to work with an international wealth advisor and estate planning attorney to evaluate the appropriateness of a trust in your overseas estate plan.
- Taxes – Although the United States has no federal inheritance tax, it does impose a federal estate tax. Fortunately, due to the current high estate tax exemption ($12.92 million for individuals and $25.84 million for married couples filing jointly in 2023), many U.S. citizens have no exposure to U.S. federal estate taxes.
However, if you live in a country with high estate or inheritance taxes, it’s important to take steps to minimize your tax exposure. Work with a qualified tax advisor who has experience with the estate and inheritance tax laws of your current country of residence.
- Attorney-in-fact – An attorney-in-fact is someone you designate to make financial decisions on your behalf while living overseas. Ideally, this person lives near your U.S.-based assets/properties and can easily manage any issues that arise, such as:
- Paying bills (insurance, property taxes, vehicle registration fees, etc.)
- Selling assets (home, car, etc.)
- Managing everyday banking responsibilities
- Applying for loans
- Filing and paying income taxes
- Serving as a contact for creditors
- Buying and selling investments
If it makes sense to designate an attorney-in-fact, your estate planning attorney can help draft the necessary power of attorney documents.
- Beneficiary designations – Before moving overseas, it’s especially important to ensure your beneficiary designations are up to date and accurate, as your loved ones will likely face additional challenges in transferring assets back to the United States following your death.
- Healthcare directives – A healthcare directive allows you to choose someone to make healthcare decisions on your behalf in the event you become incapacitated and unable to make those decisions on your own. Because your current U.S.-based healthcare directive may not hold up overseas, it’s important to review any existing documents with an estate planning attorney prior to moving.
#3 – Understand how your Social Security and healthcare coverage may be impacted.
Fortunately, U.S. retirees eligible for Social Security benefits can receive payments virtually anywhere in the world. In most cases, U.S. Social Security is only taxed by the United states (with the notable exceptions of Canada, Germany, Ireland, Italy, Japan and the United Kingdom).
Before retiring overseas, be prepared to navigate various Social Security reporting requirements and make decisions regarding practical matters, such as whether it makes more sense to receive benefit payments via international wire transfer or direct deposit.
It’s also important to ensure the healthcare system in your new country of residence is adequate to meet your needs. Take time to understand what medical services and private insurance options are available to you as a foreigner. You may need to find an international policy to provide coverage if you’re ineligible to participate in your new country’s healthcare system. Or, you may determine the cost of healthcare in your new country is low enough that you can comfortably pay out of pocket for any necessary expenses.
Understand that Medicare typically won’t cover you while living in a foreign country. However, you may want to continue maintaining it for visits home and in case you decide to move back to the United States.
#4 – Have a financial advisory team in place before you move.
Having the right financial professionals on your side can help ease the stress of your transition. Be sure to work with an international fiduciary financial advisor, tax advisor and estate planning attorney who have experience helping Americans navigate the unique challenges they face when moving to (and living in) a foreign country.
Looking for someone to help you prepare for your overseas move? Look no further. At Creative Planning International, we specialize in helping U.S. expats and cross-border families maximize their wealth and avoid costly mistakes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and help clients develop operationally and financially efficient wealth management strategies customized to their unique set of circumstances. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.
Retiring abroad doesn’t need to derail your financial goals. Give us a call — we’ll be happy to help.
To learn more, request a meeting with a member of our team.
