Living an international lifestyle is often a rewarding, but complex, way of life for individuals and families who move between countries. We live in a world where working abroad at some point is considered to be par for the course for aspiring executives at multinational companies, and more people are seeking a change in lifestyle or better opportunities globally, instead of just locally or nationally.
While working or living abroad may be attractive for a variety of reasons, it brings a new array of daunting challenges when it comes to personal finances and legal entanglements. It can be overwhelming, but planning ahead can provide opportunities as well. If you are considering expatriation, or are even considering purchasing foreign property, do your homework before proceeding.
Become familiar with the income tax treaty between the two countries. Owning foreign property or expatriating may cause your income to be double taxed, but many nations have tax treaties to prevent this. At a minimum, become familiar with the treaty between the two countries. The treaties usually mitigate the double-taxation problem by allowing a credit against one country’s taxes for the taxes paid on the same income in another country.
If you are considering moving out of the United States, keep in mind that U.S. residents and green card holders are always required to report worldwide income to the IRS. This is different than most other countries, which only require reporting of income earned in that country.
When moving to the United States, be careful about the tax implications of living in or even just owning assets here. As long as you have assets here, you will be subject to income tax and perhaps the estate tax as well. In addition to the estate tax, you may have a death tax, or tax upon expatriation from other countries. For instance, Canadian expatriates are charged a deemed disposition tax on their appreciated assets as of the day they move out of Canada.
Noncitizen residents are also subject to more stringent gift tax laws than citizens. For example, while U.S. citizens can freely transfer as much as they want between spouses, noncitizen spouses can only transfer $133,000 (indexed annually for inflation) per year to each other. Any amount above that is subject to gift tax.
Do not assume that your local accountant or tax preparer will be familiar with international tax laws and treaties. International taxation is very specialized. You must seek out a professional who has significant experience in the field. If you don’t, you may end up paying too much, or worse yet, paying too little or under reporting, with tax penalties and long audit processes.
Retirement planning becomes tricky for an expatriate. As you change your country of residence, it is important that you don’t overlook your retirement planning. Keep in mind that pensions, annuities, life insurance products and tax-advantaged retirement accounts may be taxed when income is earned or distributions are made while you are not a resident. When distributions are made from accounts that are tax advantaged in the originating country, there are usually withholding requirements when paid to a nonresident. For example, withholding is required for a distribution from an IRA in the United States made to a nonresident, regardless of citizenship.
The tax may be mitigated by a treaty provision, but special care should be taken to understand the treaty and the tax ramifications for these types of products and accounts. In some cases, there are options such as “offshore retirement plans” that can be utilized to reduce the tax risk to help many expatriates continue to pursue their retirement goals. These retirement plans may not be tax efficient or may be costly, but they can be used when expatriating or living in multiple countries.
If you have met the eligibility requirements for Social Security, you may still be eligible for Social Security if you move outside of the country. This can also be true for forms of social retirement plans in other countries, like Canada’s Pension Plan, if you are relocating to the U.S. Like the income tax treaties, the U.S. has entered into totalization agreements with several nations for the purposes of avoiding double taxation with respect to Social Security taxes.
Investment management introduces more challenges. Most stateside brokers will not make trades in accounts for their clients who live abroad because of having to comply with the regulations of the United States and the foreign country. This is commonly true of brokers in other countries. For the foreign broker to legally deal with a U.S. resident, both the broker and his company must be licensed in the resident’s state of residence.
There may be additional challenges. Be prepared to face a variety of hurdles when making an international move. It can be difficult to obtain credit, health insurance, long-term care insurance, or property and casualty insurance. If you become very ill or severely injured, would you want to be transferred to a local hospital, and if so, how will you pay for it? There will be immigration laws to contend with and various filing requirements. Exchange rate fluctuations and cultural, language, political and regulatory differences can also hinder an otherwise smooth process.
U.S. citizens who will be working abroad for a multinational corporation must address several considerations. Since most other countries’ tax rates are higher, your employer will need to adjust your income so your net income is equivalent to what you earned here. If you are going to places like London or Tokyo, your employer may have to adjust your income for differences in the cost of living. Will you have a travel allowance? Will a driver or bodyguard be needed? Should you consider kidnap and ransom insurance? Will you have to arrange for private schools for your children and who will pay for it?
If you do some planning before you make a move between countries, you may be able to restructure your investment portfolios, your retirement accounts and your asset ownership, so your financial situation will not be as complex and your tax bills will be much lower than they otherwise might be. Talk with as many people as you can who have been through the process and seek professional help if you don’t feel confident. If you know in advance what you will be facing, then you will be much better prepared for the complexities that lie ahead.
Sally A. Taylor is director of financial planning and senior planner and Virginia E. Dhondt is staff planner in the Phoenix office of Keats, Connelly and Associates, www.keatsconnelly.com.