The Best Way to Avoid Overseas Tax Surprises

Are you getting close to retirement age and considering where you should live out your golden years to maximize your retirement savings? Perhaps the solution is to retire abroad. But since not all locations for retirement are made equal, it’s crucial to consider the tax ramifications first.

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Taxes on International Income

U.S. citizens are still liable for paying their federal taxes after leaving the country. Even though they may not owe any U.S. income taxes while living abroad, some retirees must file an annual return with the IRS. Even if they shifted all of their assets to a foreign nation, this would still be the case. In conclusion, regardless of where income is made, you could still be subject to taxation.

Unlike most other nations, the United States taxes people according to citizenship, not residency. As a result, every American citizen (and resident alien) who earns more than the required threshold for filing must submit a tax return detailing their worldwide income, including revenue from foreign trusts, banks, and securities accounts.

Even if a person is eligible for tax incentives significantly lower or eliminate their U.S. tax liability, such as the overseas earned income exclusion or the foreign tax credit, the filing requirement typically still applies.

Exclusion of Foreign Earned Income

Foreign Earned Income Exclusion permits qualified persons who have retired abroad but remain employed full-time, part-time, or self-employed to exclude all or part of their income from U.S. income tax. This sum will be $112,000 per person in 2022. If two people are married, work overseas, and pass the physical presence test or the bona fide residence test, they can choose the foreign earned income exclusion. For the 2022 tax year, they may exclude up to $224,000 together.

Tax Agreements

Several foreign nations and the United States have income tax treaties, although these agreements often do not exclude people from the need to file tax returns.

These agreements provide that certain types of income received from sources within the United States are taxed at a lower rate or are free from U.S. income taxes for residents (not necessarily citizens) of other nations. Different countries and types of income have different lower rates and exemptions.