Posted by Abundant Wealth Planning LLC

Retiring Overseas & Avoiding Tax Penalties

Retiring Overseas & Avoiding Tax Penalties

Are you nearing retirement age and wondering where to retire so that your retirement savings last longer? Retiring abroad could be the answer. But first, it's essential to consider the tax implications, as not all retirement destinations are the same.


World Income Tax

Leaving the United States does not release U.S. citizens from their U.S. tax obligations. While some retirees are not subject to U.S. income tax while living abroad, they still have to file a yearly tax return with the IRS. This would also happen if all of your assets were transferred to a foreign country. The result is that you may have to pay income tax no matter where it is generated.

Unlike most countries, the United States taxes people based on citizenship rather than residency. Therefore, every U.S. citizen (and resident alien) must file a tax return showing aggregate income (including income from foreign funds and foreign bank accounts and securities) for any tax year above the reporting limits.

The reporting requirement generally applies even if the taxpayer is entitled to tax benefits, such as excluding foreign income or foreign tax credits, that significantly reduce or eliminate U.S. tax payable.

Any income received or deductible cost paid in foreign currency must be reported in a statement in U.S. dollars. Also, tax payments must be made in U.S. dollars.

Additionally, retired taxpayers may be required to complete tax forms in the foreign country they reside in. However, you can get a tax credit or deduction for income taxes paid abroad. These benefits can reduce taxes if both countries charge the same income.

Non-resident aliens with income from U.S. sources should determine if they have a U.S. tax debt. The deadline for applying to non-resident aliens is usually April 15 (for example, April 15, 2021).


FBAR Reports

Americans who have a bank account, brokerage account, mutual fund, investment fund, or other financial accounts abroad must submit a Foreign Bank and Financial Account (FBAR) by April 15 if they have:

  • Financial interest, signing authority or other authority for one or more accounts in a foreign country, and

  • The total amount of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

A foreign country will not include U.S. territories and assets, such as Puerto Rico, Guam, U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.


Income From Social Insurance Or Pensions

If Social Security is your only income, your benefits may not be taxable, and you do not need to file a federal income tax return. If you are collecting Social Security, you should receive an SSA-1099 Social Security benefits statement showing the amount of your benefits. Also, if you are receiving income from pensions or annuities, you should receive a Form 1099-R for each distribution plan.

Retirement income is generally not taxable in other countries. As a U.S. citizen who has retired overseas and is on Social Security, for example, you have to pay U.S. taxes on that income, but you cannot be taxed in the country where you have your retirement.

However, if you also possess income from other sources (from the United States or the country of your retirement), such as part-time work or self-employment, you may have to pay U.S. taxes for some of your benefits. You will be expected to report and pay tax on any income earned in the country where you retired.

Every country is different, so consult a local tax professional or an expatriate tax professional.


Exclusion Of Income Obtained Abroad

If you retire abroad but work part-time or full-time or earn self-employment income, the IRS allows eligible people to exclude all or part of their U.S. income from the tax by using foreign income exclusion (FEIE). In 2021, the figure is $108,700. If eligible, you will not pay taxes up to $ 108,700 on wages and other income from working abroad in 2021.


Tax Treaties

The United States possesses tax treaties with several foreign countries, but these treaties generally do not exempt residents from filing a tax return.

Under these treaties, foreign countries' residents (not necessarily citizens) are taxed at a reduced rate or exempt from U.S. income tax. For some items of income received from sources in the United States. These reduced rates and exemptions vary by country and specific income items.

The provisions of treaties are generally reciprocal; that is, it applies to both treaty countries. Therefore, a U.S. citizen or resident who receives income from a treaty country and is subject to tax from foreign countries may be entitled to certain credits, deductions, exemptions, and tax rate reductions from those foreign countries.


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