If you are approaching retirement age, thoughts would have set in on how and where you can retire to make your savings last longer. Retiring abroad may be the answer. Here is a look at the tax implications of retiring abroad.
Leaving the United States does not exempt U.S. citizens from their U.S. tax obligations. While some retirees may not owe any U.S. income tax while living abroad, they must still file a return annually with the IRS. This would be the case even if all of their assets were moved to a foreign country. The bottom line is that one may still be taxed on income regardless of where it is earned.
Unlike most countries, the United States taxes individuals based on citizenship and not residency. As such, every U.S. citizen (and resident alien) must file a tax return reporting worldwide income (including income from foreign trusts and foreign bank and securities accounts) in any given taxable year that exceeds threshold limits for filing. The filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, that substantially reduce or eliminate U.S. tax liability.
Any income received or deductible expenses paid in foreign currency must be reported on a U.S. return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars. In addition, taxpayers who are retired may have to file tax forms in the foreign country in which they reside. You may, however, be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.
Nonresident aliens who receive income from U.S. sources must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is generally April 15 (e.g., April 15, 2019). U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust or another financial account are required to file a Report of Foreign Bank and Financial Accounts (FBAR) by April 15 if they have financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you are spending your retirement years.
However, if you receive income from other sources (either U.S. or country of retirement) as well, from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits. You may also be required to report and pay taxes on any income earned in the country where you retired.
Consult an expert tax professional specializing in expat tax services.
