As an American retired abroad, no matter where in the world you are living or how long you reside there, you are required to file a U.S. tax return each year.
The one exception is if you earn less than the minimum income tax filing threshold any year. This amount changes each year, but is about $12,000 for those under age 65 and $13,600 for people age 65 and older, and these amounts double for married couples. Many retirees exceed that level of income and so must file an annual return with the Internal Revenue Service. However, this does not mean that you will owe U.S. taxes. The amount of tax you must pay Uncle Sam will depend on where your money comes from.
If you will be fully retired in another country and intend to live on Social Security or other retirement income alone, the move should be tax-neutral. However, if you will continue to work or have other sources of income beyond Social Security or pension income in your new life overseas, you might need to do some international tax planning.
The biggest tax-saving opportunity for Americans living overseas full time is the foreign earned income exclusion. If you plan to earn an income overseas, including wages you receive for services performed or running your own business, the first $105,900 of it can be tax free in 2019. That's how much income the U.S. government allows any American residing full time in another country to earn before owing U.S. income tax. The foreign earned income exclusion is also adjusted for inflation annually.
Other deductions, exemptions and double taxation agreements can reduce the tax owed on investment income. Further, as an American abroad, you should not be liable for state tax or, if you're paying social welfare taxes in another jurisdiction, Social Security tax.
If you're not physically present in the United States on April 15, the IRS grants you an automatic filing extension until June 15, no form required. However, if you file Form 4868, the application for an automatic extension of time to file a U.S. individual income tax return, by April 15, you can be granted a six-month filing extension until October 15.
IRS Publication 54 is a tax guide for U.S. citizens residing abroad. Download a copy for reference as you work through your retire overseas tax planning.
In addition to an annual tax return, an American with a bank account in a foreign country is required to report the existence of that account by checking the relevant box on Schedule B of Form 1040. If you hold $10,000 or more aggregate in one or more bank accounts outside the United States at any point during the year, you must make an additional, separate filing of Form 114. Commonly referred to as the FBAR, this report of foreign bank and financial accounts is filed with a bureau of the Treasury Department. The due date is April 15.
There is another annual filing requirement if you own foreign financial assets exceeding certain thresholds. Americans overseas may need to submit Form 8938, a statement of specified foreign financial assets. A home that you hold title to in your own name does not qualify. However, if you purchase a piece of property through a corporation, then it does count as a foreign financial asset and should be reported if you meet the filing thresholds.
Tax planning for expats can get complicated. It's easy to overpay because you're not aware of all the tax breaks available to you. Consider seeking tax counsel as part of your overseas retirement planning. Speak with a U.S. tax attorney or accountant with experience helping Americans abroad address their U.S. tax obligations. Your current tax advisor may not be familiar with this part of the tax code. You'll need to seek out someone who works specifically with Americans living and investing overseas.
[See: 7 New Taxes Retirees Face]
In addition to your ongoing filing obligations in the United States, as an American retired overseas you could acquire some tax obligations in your new country of residence, which will vary depending on your sources of income. Most countries do not tax retirement income. However, if you have earned or investment income or run a business you should seek advice from a local attorney or tax specialist. Your U.S. tax advisor will not be able to help you understand potential tax liabilities in your new country. As with your U.S. obligations, you may not owe tax in your new country, but you could have a filing requirement.
No matter where you eventually decide to relocate overseas, the key to successful tax planning is to prepare before making your move. Certain options for reducing your local tax bill can come off the table once you've taken a local address. You should seek American and local legal advice.
Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group.
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