If you are thinking of retiring abroad, you’re not alone. In fact, just over 1 in 10 American workers are thinking of going overseas to retire, according to a 2020 survey by the Aegon Center for Longevity and Retirement. And if you do decide to move overseas, you will be joining over 430,000 retirees who are already enjoying retirement abroad.
But what makes retirement abroad an attractive idea for many? The main driver appears to be simple economics: The cost of living in the United States is rapidly increasing. Prices for housing, food, and gas are rising at the fastest rate in 10 years. For a retiree with limited savings and no fixed income, this could mean a massive lifestyle downgrade as the years go by.
Moving abroad allows people to make the most of their retirement savings by taking advantage of the lower cost of living in many countries. But before you start thinking about sipping cocktails in Mexico or Thailand, you first need to prepare for your tax obligations. American retirees are still required to file a U.S. tax return every year, even if they live abroad. Here’s a quick guide to get you started.
Do I need to file taxes after retirement?
Just because you have moved to a different country does not mean that you no longer have tax obligations in the United States. The U.S. is one of the few countries to have adopted a citizenship-based tax system. This means that American citizens and permanent residents (also known as Green Card holders) are taxed on their worldwide income, even if they are based abroad.
The same tax rules apply wherever you live. For tax year 2021, the minimum income threshold is $12,400 for single filers under the age of 65. If you are self-employed, you have to report income over $400.
You may also need to file a state tax return, depending on the tax rules of the state where you last lived. For instance, if you maintain homes or other real properties in the United States, you may still be considered a state tax resident even if you have moved abroad for retirement.
What counts as income
Employment and investments are not the only sources of income you need to report to the IRS. For retirees, income may also include pension distributions, Social Security payments, interest, and dividends.
Foreign asset reporting for expat retirees
You also need to report foreign accounts and assets to the IRS.
For instance, you are probably going to open a foreign bank account if you are planning to retire abroad. Having a foreign bank account will make your life easier, especially if you are planning on living abroad for a long time. If the total value of your foreign financial accounts (e.g. bank accounts, brokerage accounts) exceeds $10,000, you need to file a Report of Foreign Bank and Financial Accounts (FBAR).
If you own foreign financial assets such as houses and rental properties that are collectively worth over $200,000, you also need to declare them using Form 8938, or Statement of Specified Foreign Financial Assets. Your main residence is excluded from this requirement.
How to avoid double taxation?
If you decide to work or open a business abroad, you will need to pay income tax to your new host country. This could lead to a potential for double taxation since the United States taxes its citizens on their worldwide income. Here are a few ways to avoid this.
Foreign Earned Income Exclusion
One of the most popular ways to avoid double taxation is to use the Foreign Earned Income Exclusion (FEIE). The FEIE allows taxpayers to exclude income up to a certain threshold.
For tax year 2021, you can exclude up to $108,700 of earned income. That means income under that threshold is no longer subject to U.S. income tax. However, you still need to file a federal tax return even if your tax liability has been eliminated.
You must meet the physical presence test to claim this tax break. For starters, you need to physically live in a foreign country for at least 330 days in a 365-day period to claim the FEIE.
The FEIE only applies to earned income, or income derived from self-employment or a regular job. You cannot exclude pension income, capital gains, bank interest, annuities, and dividends using the FEIE.
Foreign Tax Credit
Another way to lower your tax liability is to take a foreign tax credit. You can claim an equivalent dollar value of income tax paid to a foreign government.
Income that has already been excluded under the FEIE is not eligible for a foreign tax credit. You can, however, take a tax credit on earned income that exceeds the FEIE threshold.
How to file an expat retiree tax return?
Retirement is meant to be a relaxing chapter of your life, but U.S. tax rules can make your time a lot less fun. You are expected to file a federal tax return every year, and staying on top of ever-changing IRS rules is the last thing you want to do. If you want to make the most of your retirement, your best option is to talk to tax professionals.
TFX has been preparing U.S. tax returns for Americans living abroad for over 25 years. Our team of experts can help you save time and energy and lower your tax liability. Having a tax expert process your return ensures that you have more time for the things that matter.
This extremely detailed and informative post comes to Leisure Freak from Veronica Rhodes at TFX.
TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.
