Financial Considerations for Expats
NEW YORK ( MainStreet) If you've dreamt of moving abroad and living a supposedly glamorous international lifestyle, then you may also want to consider the financial implications. On one hand, online banking and voice over IP (VoIP) calling have made it easier for Americans to manage their money and stay in touch with financial advisors or accountants from anywhere in the world.
But the Foreign Account Tax Compliance Act (FACTA), which Congress approved in 2010, has created additional headaches for many. In fact, CNN Money reports that 3,000 Americans renounced their U.S. citizenship last year, three times as many as the average over the previous five years, a fact it attributes in part to these new regulations.
The financial impact of moving overseas will, of course, vary depending on the laws in your new country and other factors, but here's a look at areas to consider.
Americans working abroad are generally exempt from paying U.S. tax on their first $97,600 (in 2013) in foreign earned income, but they are still required to file a return with the IRS and report all worldwide income regardless of where it's earned. "Generally if you move to a higher tax jurisdiction, you're going to pay to that jurisdiction," says Grafton "Cap" Willey, Managing Director at national accounting firm CBIZ MHM. Many countries have tax treaties with the U.S. so that U.S. citizens living in those countries can avoid double taxation. Under FACTA, Americans living abroad are also required to report financial bank accounts held outside the United States.
A few states may try to collect income taxes even after you move abroad unless you actually terminate your residency. For people who live in those states, "I'd change my license, change my voting registration and establish a domicile in another state [before moving abroad]," Willey says.
Some companies that hire lots of Americans as employees also have a "tax equalization" policy to offset additional taxes created by working in a foreign country. "There may be some assumptions who gets which deductions and where they live," says Larry Feibel, international tax partner at accounting firm Anchin, Block & Anchin. "Some employers will go ahead and pay that. Some companies will have the employer file their returns and at year end they will settle up."
Depending on the country you're moving to, you can typically keep existing retirement accounts like an IRA, but you may not be able to continue adding pretax dollars to them. Any pensions or retirement accounts you set up in a foreign country may also be subject to different rules in that country versus the U.S. "If you own a non-U.S. annuity, the IRS might not give that annuity the same tax qualifications that they would give to an American annuity and it would in fact be taxable to you," says Douglas Goldstein, president of the international investment advisory and financial planning firm Profile Investment Services, which is based in Jerusalem, Israel. He's also the author of The Expatriate's Guide to Handling Money and Taxes .