Whether you’re looking for a change of scenery, want to immerse yourself in a new culture, or dream of living someplace sunny year-round, retiring abroad has plenty of appeal. Many Americans are looking to make a change: Earlier this year, a Monmouth University poll found that about 17% of Americans over the age of 55 wanted to settle abroad compared to just 4% in 1974.
While retiring abroad undoubtedly has its perks, there’s one thing many expats forget to plan for: paying taxes.
“You have to remember that as a U.S. citizen, you are taxed on your worldwide income regardless of whether you live in the United States or not,” said Megan Gorman, a tax attorney and the founder and managing partner of Chequers Financial Management. “You need to do specific due diligence to protect yourself against the concept of double taxation.”
A few things you should know to start:
- All U.S. citizens must file a federal tax return; state tax rules vary
- Expat taxes are due by June 15, but if you owe money, you must pay your tax bill by April 15
- Some foreign countries will require you to file a tax return and potentially tax your U.S. income (including your retirement income,
Don’t panic — retiring abroad is not only possible, it’s relatively straightforward with the right foresight and planning. Here’s what else to think about.
Use tax credits and exclusions to reduce your U.S. tax burden
There are a few different ways expats can reduce their tax burden.
Foreign Earned Income Exclusion
One is the Foreign Earned Income Exclusion, which allows U.S. citizens to exclude income earned abroad from their U.S. tax return. For the 2023 tax year, expats could exclude up to $120,000 in eligible foreign-earned income from their federal tax return. If you’re working part-time or consulting in retirement, this tax exclusion may be beneficial for you.
Foreign Housing Exclusion
The Foreign Housing Exclusion is similar: U.S. citizens who live abroad can deduct the cost of their housing on their U.S. tax return, up to a certain amount.
Foreign Tax Credit
Another option is the Foreign Tax Credit. With this credit, “You pay tax to the other taxing authority, and you take a credit on your U.S.-based return for those taxes paid on those income items,” said Gorman. This can sometimes zero out the amount you owe the federal government, though you may still owe tax to your state.
Look for a country with a tax treaty to prevent double taxation
The U.S. has tax treaties with many countries around the world. That means the two countries have decided how they’re going to treat the income of each other’s citizens. The treaty essentially gives you a guidebook for how to file what and where.
For example, said Gorman, “If someone has abandoned domicile in the U.S. [meaning they no longer live in the U.S.] and they are receiving income in the U.K., then they will still file a tax return in the United States but they may simply take a credit for what was paid to the U.K. and pay tax to the U.S. only on income the U.K. does not tax. So you may still be filing tax returns in both jurisdictions.”
Note that these treaties don’t necessarily apply to your state taxes. You may still have to file in your state and pay tax to your state (this varies and will depend on the specifics of your situation).
Work with an experienced tax professional before you go
Before you leave your American life behind, Gorman strongly recommends hiring a firm that specializes in cross-border taxes. They can help you strategize and get organized for tax time, provide long-term support once you’re overseas, and help you figure out things like whether or not it makes sense to keep a home in the U.S. While it may cost a few thousand dollars upfront, Gorman said it’s well worth it.
“This might seem like a little much for a lot of taxpayers,” said Gorman. “But if you get in the crosshairs of the IRS and do this incorrectly out of the gate, it will cost you more in the long run.”
The good news, she said, is you’re not the first person to go down this path. “There are many people who have moved abroad and there are a lot of countries where it is relatively straightforward.”
She recommends starting with a balance sheet or net worth statement listing out all your assets and sources of income. That includes your earned income (such as a salary, consulting income, or royalties) and unearned income (capital gains, dividends, interest, and distributions from retirement accounts). This will help your tax professional figure out what will be taxed where, and how you need to prepare.
A few other things to consider
Choose the right country
You may have your heart set on moving to a certain country — perhaps it’s your family’s country of origin or a destination you’ve visited frequently. But if you simply want a mix of the right lifestyle, a lower cost of living, access to affordable health care, and fair tax treatment, some countries attract U.S. retirees for a reason.
Those countries, Gorman said, include Mexico, Costa Rica, Portugal, and Panama, among others. “Those have become the places people look for because they meet all the requirements,” she said.
If you’re not dead set on a certain location, consider a country that’s friendly to American retirees.
Think about healthcare before you go
While you’ve likely thought about basic health care in your new home country, Gorman said one of the biggest mistakes she sees expat retirees make is forgetting to plan for a serious long-term illness or health event.
“You have to think about catastrophic health care,” Gorman said. “How will you handle that in those countries?”
She recommends keeping a U.S. health care policy to cover you in the event of a serious accident or injury or if you need long-term care for a terminal illness. “You need to have some sort of backup plan in the U.S. in case you have to return,” she said.
Make a foreign estate plan
You may already have an estate plan for your assets in the U.S., but if you have a home, financial accounts, or other assets in a new country, you need to make a formal plan to deal with those after your death. When preparing your estate plan, account for transfer taxes and other costs your heirs may have to pay.
Is renouncing your U.S. citizenship worth it?
Renouncing your U.S. citizenship is one way to get out of paying U.S. taxes when you live abroad — but it’s a huge decision.“You have to really be sure that that is something you want to do,” Gorman said. For one thing, you will likely be subject to an “exit tax” when you leave the United States. “It’s a final bill for assets that haven’t been taxed yet,” such as pre-tax retirement accounts or capital gains on a house.
“At the end of the day,” she said, “you have to think about the protections and the rights that you get as an American citizen around the world and don’t just make decisions purely on tax.”