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Tax Strategies to Consider Before Moving Abroad

By: Manvi Sidhu

Moving abroad is an exciting venture, but it comes with important financial considerations, especially when it comes to taxes. Careful tax planning can help you navigate the complexities and optimize your financial situation before making an international move.

Here are some factors to consider before taking that leap.

Understand Tax Residency Rules

Before moving abroad, determine your U.S. tax residency status. U.S. citizens and Green Card holders are generally considered tax residents, and they must report their worldwide income to the Internal Revenue Service (IRS).

Similarly, states have varying criteria for residency, and understanding your status helps in assessing your ongoing tax obligations. Some states may require you to file as a part-year resident or maintain specific ties to the state. Understanding your tax residency is fundamental to meeting your obligations.

Notify Tax Authorities

Inform the IRS and state about your change of address and impending move. This ensures that you continue to receive important documents and notices. Use IRS Form 8822 to update your address. Each state has its own process for notifying the tax department, and compliance helps avoid potential issues or penalties. Submit change of address forms and any required documentation promptly.

Foreign Earned Income Exclusion

Explore the Foreign Earned Income Exclusion, which allows eligible taxpayers to exclude a certain amount of their foreign-earned income from U.S. taxation.

To qualify, you must meet either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires you to be physically present in a foreign country for at least 330 full days. These 330 days don’t need to be consecutive but must fall within the same 12-month timeframe.

The Bona Fide Residence Test involves establishing a genuine, long-term residence in a foreign country, with the intention to make it your home for extended period. There is no specific time requirement for the Bona Fide Residency Test, but factors such as the nature of your job, the location of your home, and your social, economic and personal ties to the foreign country are considered.

Meeting either test may allow you to exclude up to $120,000 per person or $240,000 if married filing jointly (when both parties are working abroad) of qualifying foreign-earned income from U.S. taxation in 2023.

Tax Treaties

Investigate tax treaties between the U.S. and the country you are moving to ― foreign tax credits can sometimes help offset U.S. tax liability. These treaties can affect the taxation of various types of income, providing potential relief from double taxation and influencing your overall tax liability.

Close State Residency Ties

Minimize or sever ties that may establish continued residency in your current state. This may include selling property, terminating leases, closing bank accounts and updating your mailing address for important documents. If applicable, explore the option of changing your legal domicile to a state with more favorable tax conditions. This might involve establishing a new permanent residence in a tax-friendly state such as Florida or Texas.

Changing residency to a new state, however, isn’t always a quick process. It often takes time. Each state requires different documents to establish that residency, so check requirements carefully.

Reporting Requirements

The Foreign Bank Account Report (FBAR) and Form 8938 (Statement of Specified Foreign Financial Assets) are reporting requirements for U.S. taxpayers with financial assets abroad. Both FBAR and Form 8938 aim to enhance transparency regarding foreign financial accounts and assets, helping the IRS prevent tax evasion and ensure compliance with U.S. tax laws. It's important for individuals with international financial dealings to be aware of these requirements and fulfill them accordingly. Failure to comply with these requirements can result in penalties, so understanding and fulfilling them is crucial.

FBAR (FinCEN Form 114): This form is required by the Financial Crimes Enforcement Network (FinCEN) and is used to report foreign financial accounts, including bank accounts, if their aggregate value exceeds $10,000 at any time during the calendar year. It's filed separately from your tax return and has an annual due date of April 15 (with an extension available).

IRS Form 8938 (Statement of Specified Foreign Financial Assets): This form is part of your annual income tax return (typically Form 1040) and is required under the Foreign Account Tax Compliance Act (FATCA). It applies to taxpayers with specified foreign financial assets exceeding certain thresholds. These assets may include bank accounts, stocks and securities. The reporting thresholds vary depending on factors such as filing status and location.

Retirement Accounts

Moving abroad can trigger changes in how your U.S. retirement accounts (e.g., 401(k), IRA, etc.) are taxed in your new country. Depending on the country you move to, tax treaties or local regulations between the U.S. and your new country of residence can influence the taxation of your retirement income. Some treaties may provide favorable conditions, while others might have specific rules.

Furthermore, contributing to U.S. retirement accounts from abroad can be affected by the tax laws and regulations of your new location. It's advisable to stay informed about these details and consult with tax experts who can guide you through the nuances and help you make informed decisions to safeguard your retirement savings.

Plan for Real Estate

Owning or selling property in the U.S. has tax implications. When selling, you may face capital gains tax, but certain exclusions might apply. Renting out property generates rental income, which is subject to taxation.

Timing the sale or exploring rental options before your move can help optimize your financial outcomes and navigate potential tax consequences effectively. If you're selling a primary residence, you might qualify for the home sale exclusion, which can minimize or eliminate capital gains tax. Renting out your property can provide income, but comes with tax obligations. If you choose to rent out your property, you'll need to report rental income on your tax return.

Deductions for expenses like mortgage interest, property taxes and maintenance costs can offset your taxable rental income. However, tax rules regarding rental properties can be complex and compliance is essential. Selling before your move might simplify your tax situation, but careful planning is necessary to optimize financial outcomes. Seek professional advice to navigate these decisions and understand the tax consequences associated with your real estate assets.

Social Security & Medicare

Living abroad can impact your Social Security benefits. While you can receive benefits outside the U.S., some countries have restrictions, and you may need to fulfill specific requirements. It's crucial to inform the Social Security Administration about your plans.

Regarding Medicare, it generally doesn't cover healthcare outside the U.S., except in limited situations. If you're eligible for Medicare and living abroad, you might need to explore international health insurance or the healthcare options in your host country. Understanding these aspects helps you plan for healthcare expenses and ensures you make informed decisions about your Social Security benefits while residing overseas.

Seek Professional Advice Before Making Your Move

Consult with a tax professional who specializes in international taxation. They can provide personalized advice based on your specific circumstances, ensuring that you comply with U.S. tax laws and take advantage of available provisions.

Move With Peace of Mind

Moving abroad brings about exciting opportunities but also requires careful financial planning. By proactively addressing tax considerations, such as residency rules, foreign tax credits and compliance with reporting requirements, you can optimize your financial situation and embark on your international journey with greater peace of mind.

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Published January 10, 2024

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