Don’t Be A Hero

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, we’re still no experts. But we’ve been fortunate enough to get to know people who are.

Which leads to our 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 in 1999, 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 or 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 income we might ever bring into Ireland. This way, there could be no confusion. We could move into Ireland savings from before being tax resident and not be taxed on it since it was earned before moving. Once that money was gone, we could start moving in earned income and pay tax on that.

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 2020, the FEIE figure is US$107,600 for a single person, meaning a couple can claim up to US$215,200 tax free. For tax year 2021, the FEIE amount is US$108,700 for a single person and US$217,400 for a couple.)

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 most countries do (with some complicated exceptions).

This stuff changes all the time, but right now Portugal shines when it comes to favorable tax policies. As a resident of Portugal, you can apply for Non Habitual Residency status in order to receive pensions and foreign income taxed at a flat 10% rate.

For the very wealthy who want to reduce their total tax burden, Switzerland is still a popular destination. The Swiss government allows you to negotiate an annual tax with whatever canton you want to reside in. That tax is your only tax, i.e., there is no graduated tax on your income. For those with multi-million-dollar incomes who live in a high-tax jurisdiction, Switzerland is a good choice for residency to reduce your overall taxes, but it isn’t an option for everyone.

And, frankly, choosing your country of residency based on your tax situation isn’t the wisest decision. Saving on income tax won’t make up for not enjoying where you’re living… unless you’re saving enough to allow you to travel most of the time.

However, there are plenty of places with good residency visa options that also have potential tax benefits.