Many people plan on living abroad when retiring. However, many retirees forget that there are tax and estate rules to think about before deciding to move to a foreign country.
Just because you live in another country does not mean you stop paying taxes in the United States. As a U.S. Citizen, you are required to file your taxes with the IRS and must include property and other assets you have abroad. There are serious implications and penalties if you fail to file taxes on time or if you underreport your assets. In addition to filing taxes with the IRS, you will most likely have to file taxes in the foreign country of residence. You could also be subject to gift and estate taxes in both the U.S. and the foreign country.
With respect to U.S. federal taxes, the foreign earned income exclusion allows you to exclude up to $104,100 in overseas income (in 2018). However, that does not apply to retirement income. U.S. citizens residing in a handful of countries including, but not limited to Canada, Israel and Egypt are exempt from federal taxes on social security. For those other countries, up to 85% of your social security benefits and any other income, may be subject to federal income taxes, regardless of where you live.
Opening or maintaining a bank account abroad has become more difficult. The Foreign Account Tax Compliance Act is a law that requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS. Generally, the aggregate value of these assets must exceed $50,000 to be reportable. The law was designed to prevent Americans from hiding assets abroad. It would be beneficial to establish a savings and checking account with an institution that has international reach, and/or consider maintaining your U.S. bank account that you can access online, and get U.S. credit and debit cards that don’t charge foreign transaction fees.
Most U.S. health insurance companies do not provide coverage outside the U.S., nor does Medicare. It is advisable to inquire with the embassy of your destination country to see how you can be covered as a foreign resident. You may be eligible for government-sponsored health care. Most people who retire abroad eventually return to the U.S. If you receive Medicare, note that Part A (hospital insurance), will be available to you if you return to the U.S. You can continue paying for your Part B benefits (medically necessary and preventative services) while out of the country.
Retirees can have their Social Security benefits sent to almost anywhere in the world. However, there are several countries that the Social Security Administration will not send payments. Countries include Cuba, North Korea, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.
Some foreign countries don’t allow non-citizens to own real estate. As a result, you’ll have to own the real estate through a trust or a corporation or have a local agent hold the title. Owning real estate through a foreign trust or corporation can result in onerous tax and reporting requirements in the U.S.
It’s crucial to update your estate plan to reflect the laws in both the U.S. and the foreign country. Inheritance and estate planning laws can be very different abroad. In many cases, international law will dictate what happens to your property held in that country, despite what you stated in your Will. You should consult with an attorney to update your Will, and estate planning documents to ensure it covers both countries.
There are several things to consider before deciding to move abroad, but if you are thinking about retiring abroad and need assistance with updating your estate planning documents, contact us by calling 856.782.8450 or visiting our website at www.timriceelderlaw.com.