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Retiring Abroad? 3 Important Tax Implications to Consider First

This article is intended for educational purposes only and is not legal advice. For guidance on your personal situation, please contact a lawyer.

The riches of retirement abroad — by the beach, in the mountains, in historic cities soaked in sun and culture — are a dream come true for a lot of Americans. But those riches can come at a cost, especially if you’re not hip to the tax laws you’re beholden to, both here and in your new chosen land.

So, along with studying your potential new home’s healthcare and housing options, be sure to get a clear understanding of how its tax laws and ours will affect your nest egg.

Below are three broad considerations to keep in mind.

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1. You might not return each year, but your tax returns have to

Whatever burdensome obligations you leave behind when you make the move, filing your taxes back home isn’t one of them. U.S. citizens and even green card holders are generally obliged to file a U.S. tax return every year.

The section of the IRS website entitled U.S. Citizens and Resident Aliens Abroad says: “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. You are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code.”

The website also says that you can only get tax benefits such as the foreign earned income inclusion and foreign tax credits by filing a U.S. return.

2. Be aware of tax treaties and local laws

You’ll want to be diplomatic when you become a stranger in that strange (for now) new land, but negotiating tax treaties probably won’t be on your plate. They’re already in place in many countries, and some of them offer tax incentives, including the opportunity to avoid double taxation on your passive and active income in your new home.

But tax rules and regulations vary widely, including the rates you’re expected to pay, what’s considered “residency,” and so much more. Just like you need to consult an expert here, do so over there. You could find yourself paying higher taxes abroad than at home, and running afoul of tax laws can be a costly exercise in fines and penalties.

3. Selling assets and passing them on can be different, too

Transferring your assets such as real property and stocks, whether by selling them or passing them on in your estate, will have its own tax considerations here and there, and can differ broadly depending on your new “there.”

Your new country might have its own rules on capital gains taxes, for instance. Same thing with inheritance taxes. Consult a trusted tax and estate planner on those matters both here and in your new home before you sell assets and as you plan your estate.

Keep your eyes wide open, and you’ll keep the surprises pleasant

Retiring abroad can be a dream come true, with new adventures around every corner. Comprehensive tax and estate planning can help you avoid unpleasant surprises on that retirement journey. Be sure to use professionals well versed in the laws of whatever country you find yourself in — including back in the U.S.

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