Day 10: Step #5, Understanding The Tax Implications Of Your Move Overseas
How Much International Tax Planning Do You Really Need?
Dear Student,
As I explained yesterday, the three most important practical matters you must address at this early phase of your live- or retire-overseas thinking and planning are, first, residency options (as you’ve been doing for the past couple of days); second, taxes; and, third, health insurance.
Today, therefore… taxes…
As I also explained yesterday, we didn’t move from the United States to Ireland about 20 years ago to acquire second (Irish) passports.
And we didn’t move to Panama seven years later to reduce our tax bill. These aren’t reasons to relocate your entire life to a new country.
But they’re parts of reasons… parts of the puzzle you’re piecing together as you work to identify the best approach and the best destination, the how and the where of your new life overseas.
You don’t want to organize your life around tax code, but, no question, controlling your tax liability can make a big difference in your standard of living. Reduce your tax bill from, say, 40% a year to, say, 20% a year and it’s like giving yourself a raise and super-charging your investment portfolios. You’re earning no more, but you’ve got a whole lot more disposable income.
We Americans have it double tough. No matter where we go, our obligations to Uncle Sam follow. When we take up residence in a foreign jurisdiction, therefore, we’ve got double the tax masters. We’re beholden to both the IRS and the local tax collector.
We must understand the tax requirements on both sides, and we must file annual tax returns in both jurisdictions… but that is not to say we owe double the taxes.
On the contrary. As an American abroad, you can reduce your annual tax burden, even significantly, from what you were paying when you were residing full-time within U.S. borders.
This is where things get interesting… and complicated.
Don’t worry. You don’t have to become an international tax guru to manage this part of your new life in paradise. After more than 30 years researching this stuff and more than 20 years or so paying taxes in multiple jurisdictions personally, I’m still no expert. But I’ve been fortunate enough to get to know people who are.
Which leads to my first and probably most important piece of advice on this subject: As you put in place your plan for relocating to a new country, don’t try to become a global tax authority. Hire one.
In fact, hire two. One in the jurisdiction where you’re planning to live or invest… and another in your home country.
During one of our scouting trips to Ireland before our move all those years ago, we met with Ernst & Young in Dublin. We didn’t know what we didn’t know, but we knew enough to ask for help.
At the time, Ireland taxed its residents on a remittance basis. That is, living in Ireland, you paid tax only on whatever money you earned or brought into the country. You could earn hundreds of thousands of dollars a year. But if you brought (remitted) only US$50,000 per year into the Emerald Isle… the Irish tax authorities expected their cut of that US$50,000 only. Maybe you owed other tax authorities in other countries other tax on other pieces of your total income… but Ireland cared only about the piece of your income that flowed into Ireland.
The Ernst & Young tax guy we met with explained this to us and then he made a critical recommendation. He told us to organize ourselves so that all assets held prior to our move to Ireland were lodged in separate accounts from any assets we might ever bring into Ireland. This way, there could be no confusion. The Irish tax collectors could never lay claim to any assets clearly separate from other assets that might ever be remitted to Ireland.
And, then, he said, as long as you’re living in Ireland, make sure that money you don’t intend to remit to Ireland goes into those other accounts. Make sure everything is clearly separate from the start… and keep it that way.
We followed his advice.
In addition, as Americans residing and working abroad, Lief and I both were able to take advantage of the Foreign Earned Income Exclusion (FEIE), meaning that our first US$80,000 to US$85,000 of income each year apiece was free from U.S. tax. (The amount of the exemption has increased since then. In 2022, the FEIE figure is US$112,000 for a single person, meaning a couple can claim up to US$224,000 tax free… we’ll address the current particulars of the FEIE and how it might help with your international tax planning tomorrow.)
Plus, Ireland and the U.S. have a double-taxation agreement, meaning we didn’t owe tax in the States on any income taxed in Ireland.
Bottom line, by organizing ourselves carefully, as Irish residents, we were able to reduce our overall rate of tax to less than 20% per year.
The tax laws in the Emerald Isle have changed significantly in the past couple of decades, and Ireland no longer taxes its residents on a remittance basis. Today, Ireland taxes residents on their worldwide income… just as the U.S. does (with some complicated exceptions).
Yikes.
As I’ve explained, we didn’t move to Panama because of its tax laws… but it hasn’t escaped our notice that the country’s position on taxing its foreign residents is about as good as it gets.
In Panama, we’ll be paying tax only on the money we earn in Panama. You gotta’ love that.
Panama is not the only tax-advantaged jurisdiction worth a close look right now. Belize is another place where, as a resident, you pay tax locally only on the money you earn locally.
Furthermore, remember, Belize is one of the easiest places in the world to become a full-time (legal) foreign resident…at least if you’re older than 45.
Other countries where foreign residents can live tax free include the Dominican Republic, Nicaragua, Costa Rica, Uruguay, and Malaysia. It depends on how much income you earn and where it comes from. If you’re a resident of Portugal, you can apply for Non Habitual Residency status in order to receive pensions and foreign income without it being taxed in Portugal for 10 years. But, again, it’s possible, and it’s legal. You just need counsel you can trust to help you consider the options and make a plan.
Don’t Google “foreign tax specialist” or “international tax advisor.” You’ll find lots of resources that way… but none you can trust. The internet is awash with guys who’ll set you up with offshore structures for a fee and who’ll be glad to help you get one over on the IRS.
You don’t want to get one over on the IRS. You just don’t want to pay that U.S. government agency US$1 more of your income than you absolutely have to each year.
And you don’t necessarily want offshore structures either.
I have no idea what you do want…or need. And, probably, neither do you. But I can tell you this: Take the advice of some offshore expert you find with the help of Google, and your chances of ending up someplace you don’t want to be (engaged in a one-on-one conversation with a representative of the IRS, for example) are probably increased.
Neither should you dash off an email to your U.S. accountant or attorney asking for help managing the tax consequences of your new life or investments abroad. He won’t have answers for you, and your questions will make him nervous.
My U.S. attorney way back when, at the time we were planning our move to Ireland, told me not to mess around with the Foreign Earned Income Exclusion for Americans living abroad. “It’s too risky,” he counseled me. “Better just to pay what you owe and not to try to get away with anything.”
I understood almost nothing about any of this at the time, but I knew enough to know he didn’t know enough. He’s no longer my attorney.
I didn’t replace him immediately or easily—though not for lack of trying. I began looking for a competent, experienced, and open-minded U.S. tax advisor as soon as I realized my attorney of many years was none of those things when it came to the issues faced by Americans living and investing abroad.
Over the past 30+ years covering this beat, I’ve met a lot of guys who call themselves tax experts. Finally, a few years ago, I met a guy who I’d call an offshore tax expert. His name is Vincenzo Villamena.
Our situation has grown ever-more-complicated since we left the States, but Vincenzo has organized and simplified as he has counseled us in how our lives overseas (including today from our current base in Panama) impact our U.S. tax obligations.
Vincenzo knows his way around the offshore world. He knows what’s allowed and what’s not, and he respects the rules. He also knows how to solve problems and how to get things done. Our experience with Vincenzo over the past four years has been remarkably efficient, painless, and productive… wholly different from our experience with the half-dozen other offshore advisors we tried to work with prior to finding Vincenzo.
I told you, though, that you need not one, but two global tax authorities, one to manage tax, reporting, and structure issues for you in the States… and one to manage those things in your jurisdiction of residency.
Bottom line, and in layman’s terms, here is what you should be aware of as you address your international tax planning agenda. These are six things I wish someone had told me about international tax planning before I made my first international move:
- Maybe you don’t need to do anything. Asset protection isn’t an issue until you’ve got assets enough to warrant the investment of time and money to figure out how to protect them. In some jurisdictions, yes, you’re wise to hold property in a local or an offshore corporation, but not all. Before you do anything, make sure you understand why you’re doing it and what the real benefit will be.
- Whatever you do, it shouldn’t cost you tens of thousands of dollars. Okay, maybe if you’re Bill Gates or Warren Buffett, a big investment in managing your tax and asset issues is warranted. But for Average Joes, it’s not.
- The Foreign Earned Income Exclusion may be the beginning and the end of the tax planning you require. Again, we’ll address this specifically tomorrow.
- No attorney in your home country is going to be able to help you figure out what to do in your new country of residence. You need a local attorney in your new country of residence, experienced at working with foreign residents, to help you determine your local tax liabilities and obligations. Sometimes, for example, depending on your situation (if you’re running a business, for example) a local tax filing may be required even though no local tax is due.
- No matter where you eventually decide to relocate overseas, the key to successful tax planning is to carry it out before taking up residence. Certain options for mitigating your local tax bill can come off the table once you’ve taken a local address. Again, you need local legal advice.
- You can avoid any local tax issues altogether by being only a part-time resident. The particulars differ from jurisdiction to jurisdiction, but, generally, if you spend fewer than six months in a place, you are not considered a full-time resident for tax purposes. There are exceptions, so, again, you need personal advice. We’ll return to the idea of planning for a part-time life overseas later in the program.