Monthly Archives: July 2017

Tax, while living abroad

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B. Franklin said: In this world, nothing can be said to be certain, except death and taxes. Paying tax is our duty, as responsible citizens. US definitely does not have the highest tax in a world. However, in contrast to other countries, it imposes tax on every citizen, no matter where he or she lives. As long as you are US citizen, you must submit a federal tax return. Along with US tax return, you are also required submitting a tax return in other country to comply with local laws, just in case if you prefer to live in other country for an extended time. Most countries require to submit a tax return, when someone is physically present in the country for at least 183 days in a year. Does it look scary? Actually, it can be managed. In this article, I wanted to focus on foreign tax specifics for US citizens living abroad.

First, I would like to discuss US tax. The tax form 1040 must be submitted, regardless where you live. The deadline for Americans living abroad is June 15th, but it still makes sense to submit a tax return by April 15th because of the interest charged if some tax is due. Taxes must be paid on the combined worldwide income. However, there are two methods, US citizen can use to reduce tax: FEIE (Foreign Earned Income Exclusion) and FTC (Foreign Tax Credit).

Any US citizen with a tax residence outside of US is qualified for FEIE. Even without foreign tax residence established, anyone who have been outside of US for 330 days during the tax year is also qualified for FEIE. The exclusion is applicable to the income received for performing services in other country, i.e. wages, salaries, tips, etc. Capital gains, dividends, rental income, pensions are not considered as earned income and no exclusion is allowed. In 2017, the exclusion limit is $102,100. This would mean, that  no tax will be withheld  on any earned income below this limit. However, if the amount is greater than $102,100 then the difference between the earned income and exclusion limit is taxable at the rate of the total income earned abroad. For example, no tax is required for the annual income $90,000. However, for the annual income $110,000 tax is due on $7,900 at the rate of $110,000. This would mean, that 28% tax on $7,900 (which is equal to $2,212) will be collected.

Typically, no state or local tax is due for those living abroad, as long as they do not have any property or income from the sources within the state. For example, if someone living abroad rent out his or her property, tax on the rental income along with the property tax must be paid. But rules and regulations are different across the states. Most states would release their former residents from tax obligation, as long as they live for more than 6 months outside the state. But some states makes it extremely difficult to end the residency, in particular: California, Virginia, South Carolina, New Mexico. In order to leave one of these states, former resident must prove that he or she has no intention to return to the state and there are no connections left. For example, in California you must file a non-resident tax return, as long as you are physically absent but still “domiciled” in the state. Under the “domicile” term, authorities consider the place where you intend to return. Your property, the place where spouse and children live, days spent inside the state, obtaining professional services, bank accounts, organizations membership, driver license, voter or vehicle registration are among the “domicile” considerations. By the reasons stated above, it is always advised to establish home address in one of the states which does not have income tax, before leaving US.

In order to avoid double taxation, US has tax treaties with more than 42 countries. FTC can be claimed for a tax paid to the foreign government, to reduce the amount of tax on worldwide income paid to US government. It is available to anyone, who have earned or investment income in a foreign country. For example, if tax is paid on investment property in foreign county, then this tax is exempt from US tax. But in case of retirement, the income typically comes from US sources. Does it mean, that the tax paid to US government is also due for a foreign government? It is normally not a case for those countries, which has tax treaty with US. For example, in Canada resident allowed claiming a foreign tax credit on Canadian return for any tax paid in US. After all, the total tax you pay while living abroad depends if the foreign country has tax higher than US or not. The final tax to be paid is typically the highest one, either in US or another country of residence. Also, some amount of small income may be exempt from tax. In the table below, you can see the tax on residents in certain countries.

It is easy to see, which country has a tax higher than US for certain level of income. Some countries are quite popular with US retirees, others are not. The most generous exemption is offered by Portugal: foreign residents do not have to pay any tax on their foreign income during the first 10 years of residency. Cyprus offer 19K Euro exemption, which may be a deal for those with low income from US. But what about some Latin America countries, popular with US retirees like Costa Rica, Panama, Ecuador? All these governments actually share tax payers data with US government. However, residents in Costa Rica, Panama or Ecuador must pay tax on income generated in their respective countries only. This would mean, that a typical retiree is responsible for US federal tax, which is essentially the same as it would be when living in US in a state with no income tax.  Also, another good news is that both Panama and Ecuador has dollar as their official currency and US citizens living there does not have to worry about exchange rates. Hate paying US federal tax? Then move to Puerto Rico: its residents are not required to pay US personal income tax.

Penalty for being poor: how it works

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It is well known, that staying rich and healthy is better than the opposite. However, it is also not a secret that many people prefer to stay poor, because of the multiple benefits they are eligible for in this country. But when anyone eventually gets sick, affordable and accessible health care is extremely important. In this article, I wanted to share some observations I had regarding health insurance currently available through the states exchange and apparently more expensive for people with lower income.

For many decades, Medicaid served as a public insurance option for those who does not have money to buy insurance and has no access to employer’s benefits. But strict requirements on income, assets and family situation still kept many people uninsured. Since Affordable Care Act (ACA) implemented in 2014, 32 US states signed up for Medicaid expansion. It is an integral part of ACA, substantially relaxing original Medicaid requirements. Pretty much everyone with income less than 138% of Federal Poverty Level (FPL) is eligible for this program. These are the states signed up for the expansion (according to Kaiser Family Foundation).


What happened to the states, which did not sign up (yellow color on picture above)? Using the main exchange website, as well as Covered California I collected some data for the insurance premium range, with respect to the annual gross income and age. These are the data for Austin, TX. Apparently, people with less than $15K annual income must pay the entire insurance price, without any subsidies. Situation changes around $15K: there are some plans available for free. For larger income, the prices are gradually climbing, because subsidies are phasing out. But they do not reach the numbers offered to people with $10K income even with $40K income!

The other chart I have, is for Portland, OR. Oregon signed up for Medicaid expansion, but the exchange site still return some numbers. And for those with income below $20K , the numbers are very high. Compared to the above chart for Austin, TX, the entire data are shifted right as subsidies are starting at $20K rather than $15K, then premiums are gradually raising but both maximum and minimum numbers are definitely lower than correspondent numbers for Austin, TX. Also, the minimum premium appears to be always lower for a person of 60 years old, compared to 55 years old for both Austin and Portland.

Finally, I decided to publish similar chart for one of the most expensive places in US: San Jose, CA. Covered California site does not return any numbers for those with annual income less than $20K: the message direct users to Medi-Cal (California Medicaid), explaining that with this income free or extremely low cost insurance is available. This is why I put zeroes there. With income $20K and above, a wide choice of insurance plans is offered with minimum numbers running around zero up to $35K income (which is substantially higher than for Austin or Portland) and maximum numbers well above other places. Minimum price decrease with age, similar to the above charts.

It is very important to be aware about the Medicaid expansion, because many people fall into the category with low income when they laid off or fired and unable to find another job for extended period. Unfortunately, Medicaid expansion will be terminated, if the repeal process is successful. Therefore, the Texas model will be likely extended into the entire country. What does it mean? You need to have an income above 138% of FPL, in order to be eligible for health insurance tax credit. One way to increase income is actually converting small portion of 401K into Roth IRA, which will generate tax event but extend annual income to be qualified. As Texas example demonstrate, the difference can be quite significant: as high as $500 per month, which will result in $6K per year. How does it compare to the tax, generated by the Roth conversion? You can see the tax rate table below. It may generate total 20% tax in a worst case, which would be $5K per year for $25K annual income. Still, less, than the premium advantage. Of course, much more savings comes from deductable and out-of-pocket expenses. But this was the worst case. In the best case (no state income tax) the federal tax of $2.5K per year would be a deal.

Retiring abroad: ugly reality

During the past decade, many Americans decided on retiring abroad. Almost everyone cited a high cost of living as a main reason, in particular the rising cost of health care. It is not a secret, that average US citizen does not have a luxury to save the amount of money, required to live comfortably at the familiar place without a job. One way to escape the high cost of living always was to move into less expensive area within the US. For example, people from San Francisco Bay Area often move north into the state of Oregon or Washington, to reduce daily expenses while keeping descent quality of life. Among east cost population, Florida and Texas has been quite popular for retirees due to the mild climate and zero income tax. But not anymore. Current situation in health care, including shrinking choices and rising prices, especially in lower cost areas forces people to look outside of US. Actually, there are plenty of Americans who currently live abroad. Most of them are happy with their choice, but things are changing rapidly. In this article, I wanted to share some information collected from different sources, including my own experience dealing with realities outside the US.

First, a few words about the cost of living and health care cost. While the cost of living may not be dramatically different in most developed countries, health care cost is definitely lower than in US. There is also a public health care system in place in many countries, which is free for all residents. Although it might be not a primary reason of moving abroad, it is still an important factor in financial planning. But do not expect free health care upon arrival: US retirees are likely not eligible for public option, because they never worked and never paid taxes into the system. Still, private insurance has very reasonable pricing and doctors are available immediately or on very short notice. In fact, health care quality in almost 40 countries is better than in US. These are the countries typically recommended to US retirees due to the reasonable cost of living, easy immigration process and excellent health care quality reported for year 2017: Spain, Ireland, Malta, Portugal. But things are changing: growing number of native retirees and high number of refugees are dramatically shifted existing landscape across many countries, especially within European Union where the highest quality health care has been traditionally delivered.

Another important aspect of moving abroad is a tax law, specific to the country of choice. US citizens are required to pay taxes, no matter where they live. At least, they require filing a tax return every year. The good news is, that there won’t be any federal tax on earned income up to $101,300 (as of year 2016). But this income must be earned. For example, capital gain, ordinary dividends or rental income are not earned income, and tax must be paid in full. This is all about federal tax. As regarding state and local taxes, it depends. Renting out a house while living abroad typically means paying property tax to the county, where house is located, along with federal and state taxes on rental income. Normally, people do not require paying other state and local taxes, if they do not physically present in the state. Different states has their own rules and regulations. For example, California may still consider you as a resident, if you have a rental property and regularly come to the state to manage this property. Alternatively, California may consider you as non-resident, if you hire a property management company: in this case, non-resident tax return is required.

While living abroad, it is still beneficial to maintain US home address. Some brokerage companies (like Fidelity, for example) are known to close accounts for those living outside of US. Banks and credit unions are less likely to close account in this case, but they still keep sending mail and some include credit cards or other useful documents. Smaller banks may have problems to send mail for the address outside of US. Of course, you can provide the relative’s or friend’s home address for that purpose. But in the later case, you automatically pass a presence test in respective state where relative or friend lives, and required to file a resident tax return for the state. In order to avoid that, it is better to establish a virtual home address with company like US Global Mail for example. For the charge of $10 per month or more, they provide a service to collect and scan the documents received on your name. Also, the good news is that these companies provide a home address in the states without personal income tax, such as Texas. Even those renting out a property in California are not required to pay state taxes on capital gain or ordinary dividends in California or any other state in this case.

Another important consideration is a foreign bank account. In order to live in other country, bank account is essential for the normal life. Which likely mean to establish a temporary or permanent residence in that country, unless you are a dual citizen of US and the country of actual residence. Typically, residency application require sufficient funds to be present in account, to make sure the retired person has enough money to live. US bank account can not be used for that purpose. Meantime, it is important to know that US citizens much report any foreign accounts which has at least $10K in combined value for any period, while account is active. This is known as FBAR filing requirement, and implemented to ensure tax compliance by the citizens living abroad. But unfortunately due to the FATCA (Foreign Account Tax Compliance Act) requirements, many foreign banks refuse to open bank accounts for US citizens. Moreover, some existing bank accounts are being closed. There are disturbing news coming in particular from EU countries about this matter. According to FATCA, all foreign banks are required to disclose financial information about Americans with money, residing outside of US. Apparently, banks are afraid of serious penalties imposed by IRS. By that reason, it is important to learn which banks still open accounts for Americans and even open it in advance, before the actual move.

As regarding credit and debit cards issued in US, situation is clearly not in favor of people moving abroad. The good news is that most credit cards will work outside of US, as long as you notify card issuer about the change of your location. The bad news is that most cards will charge a foreign transaction fee. There are certain credit cards which do not impose the fee, and some debit cards which actually refund ATM charges to owner. It is very important to choose the appropriate card carefully, if you plan to use it outside of US for an extended period. There is also one other problem: all cards expire one day. As of now, pretty much all billing and payment operations can be completed online. But the replacement card will be sent to US address, whatever is registered with card issuer. There are some banks, which can send the card to non-US address, using DHL for example. These banks need to be verified in advance, to make sure the card arrive in mail on time. But remember: you do not want to give non-US address to the companies like Fidelity, to avoid brokerage account closure. Even better idea would be to make certain arrangements, before moving abroad: close those cards which are not in use, and ask to issue a brand new card for those in use. Some cards are issued for two years, others for five or even more years. Anyway, there will be an extended period, before card expired. Finally, there is an option to issue a credit card in the foreign country: American Express for example provide such service. However, conditions may be quite different from US and credit history loss is possible.

In addition to the troubles discussed above, there is one other serious challenge: double taxation. As I already mentioned before, all US citizens are required to file a tax return with IRS, regardless of their income. They still require paying taxes in the country of residence, if they live in that country for more than half a year. Fortunately, there are tax treaties in place between US and most other countries, which effectively eliminate double taxation. This would mean, that for those Americans paid some amount of money in compliance with US tax code, can subtract this amount from the taxes they are required to pay in their country of residence. Of course, both US and foreign tax returns are getting more complicated and the help of professional tax adviser may be required.

Bank accounts and double taxation can be a problem, especially taking into account that most countries require more than $10K in account to establish a residency. Are there any solutions? One solution can be to actually live in two or more countries, without applying for residency in either of them. Most countries does not consider anyone a resident for tax purpose, if he or she physically present for less than 180 days in that country. Therefore, the best idea may be to live half a year in one country and another half a year in other country. There are certain countries such as Canada, Mexico or UK, which allow US citizens to stay up to 180 days without applying for residence permit. In fact, Americans may re-enter Canada every 180 days, as long as they do not overstay. However, most countries within EU has a 90 days rule. According to the rule, US citizens can stay up to 90 days within each 180 days in a country as a visitor. Then, it is still possible to live in two countries: one within EU and other is not, but traveling between them within each 90 days. Also, there are countries like Georgia or Palau which allow Americans to stay indefinitely as non-residents!

What is our conclusion? It is definitely possible for an average American to live in foreign country, and there are certain benefits of doing that. But before making decision to move, it is important to understand all challenges and specifics for living outside US, and be prepared to adjust the life style and expectations.