Question for the expats

[MichaelB]

I'm most interested in how people deal with their taxes as becoming an expat makes things complicated. Tax planning is one of the trickiest aspects of becoming a US expat. Obviously everyone has to file a 1040 etc, but your country of residence will also want you to comply with their laws. Do most people file on their own or employ accountants?

Local taxes (Venezuela) were a breeze. Couple of hours including the beers. Filling out the forms took less time than waiting in line at the bank to pay.

I tried to do my US taxes there but could not. Too complicated. Tax SW makes it a little easier (like a shady spot in hades is a bit cooler) but the software is limited and you need to know the forms well. TurboTax and I can do my son's US taxes (he's in Japan) but once his income gets into AMT land it gets messy. Good record keeping is critical.

There were two types of US tax preparers. One worked for the people assigned abroad by their companies, paid in US$, making big bucks, tax equalized. Typically a large global accounting firm, such as PwC or EY. Price was >$1000. The other tax preparer was him/herself an expat and worked with "regular people", folks living overseas that had gone native and were earning like locals (my case and most of the expats in this forum). They were much cheaper, advertised in the local press, and were just as good.

 

[traineeinvestor]

Those folks now in Asia and Latin America right now, are you keeping your assets in local currency or some $$/Euro combination?

Most of my/our assets are in HKD - which is pegged to the USD. The great fear/expectation is that at some stage the peg will either be removed or adjusted and the HKD. If that happened today,the HKD would most likely appreciate quite a bit as a result meaning I would take a hit on my non-HKD investments (and the HKD value of my local investments would probably also decline as well). I would probably end up paying higher interest rates on my mortgages as well (all floating rate).

People have been speculating on the demise of the HKD/USD peg since it was first introduced so this is a long standing issue.

 

[traineeinvestor]

You've already been there 20 years but you anticipate being there long term? I'd say you've been there long term and plan to make it a lifetime

True, but during the first six or seven years I kept saying "just one more year .... " so there was never a feeling of permanance and even after nearly 20 years, that's less than half the time I hope my retirement will last.

 

[nun]

Local taxes (Venezuela) were a breeze. Couple of hours including the beers. Filling out the forms took less time than waiting in line at the bank to pay.

I tried to do my US taxes there but could not. Too complicated. Tax SW makes it a little easier (like a shady spot in hades is a bit cooler) but the software is limited and you need to know the forms well. TurboTax and I can do my son's US taxes (he's in Japan) but once his income gets into AMT land it gets messy. Good record keeping is critical.

There were two types of US tax preparers. One worked for the people assigned abroad by their companies, paid in US$, making big bucks, tax equalized. Typically a large global accounting firm, such as PwC or EY. Price was >$1000. The other tax preparer was him/herself an expat and worked with "regular people", folks living overseas that had gone native and were earning like locals (my case and most of the expats in this forum). They were much cheaper, advertised in the local press, and were just as good.

If you're a retired US expat I can see things being a bit easier as most of the investments might be in the US and it's just a case of moving cash offshore. However, if you are a US citizen working overseas and live there for an extended period how do you invest your money without falling foul of nasty US tax laws. How do you deal with foreign pensions and employer contributions.

As a UK citizen having lived in the US for 25 years I never had to deal with UK taxes. That would not be the case for a US citizen moving abroad.

 

[Alan]

If you're a retired US expat I can see things being a bit easier as most of the investments might be in the US and it's just a case of moving cash offshore. However, if you are a US citizen working overseas and live there for an extended period how do you invest your money without falling foul of nasty US tax laws. How do you deal with foreign pensions and employer contributions.

As a UK citizen having lived in the US for 25 years I never had to deal with UK taxes. That would not be the case for a US citizen moving abroad.

If it were me I would employ an accountant for the first year or two to understand the ins and outs with the aim of eventually going solo.

Googling throws up a number of firms. Unfortunately I don't know anyone in the UK to ask for recommendations.

 

[MichaelB]

If you're a retired US expat I can see things being a bit easier as most of the investments might be in the US and it's just a case of moving cash offshore. However, if you are a US citizen working overseas and live there for an extended period how do you invest your money without falling foul of nasty US tax laws. How do you deal with foreign pensions and employer contributions.

As a UK citizen having lived in the US for 25 years I never had to deal with UK taxes. That would not be the case for a US citizen moving abroad.

The US tax laws aren’t so much nasty as all encompassing. US citizen expats can move their cash abroad but they will always be subject to tax on income and gains from investments, no different than if they were investing in a foreign market from the US via an ETF.

Pensions and employer contributions can be complicated but would not be the difference between self-prep and tax accountant. Most foreign based pension contribution does not qualify for deferral under US tax laws unless there is a tax treaty. Like Alan suggested, one year of tax prep with a pro should be enough to understand how it works.

 

[nun]

The US tax laws aren’t so much nasty as all encompassing. US citizen expats can move their cash abroad but they will always be subject to tax on income and gains from investments, no different than if they were investing in a foreign market from the US via an ETF.

Just to clarify (and I may be misinterpreting your comment), but owning investments like mutual funds base outside of the US will greatly complicate your US taxes. From a tax perspective holding non-US based mutual funds is very different from holding a US based EFT that invests in foreign markets.

 

[MichaelB]

Just to clarify (and I may be misinterpreting your comment), but owning investments like mutual funds base outside of the US will greatly complicate your US taxes. From a tax perspective holding non-US based mutual funds is very different from holding a US based EFT that invests in foreign markets.

AFAIK the tax liability is no different for a US taxpayer if the foreign investment is domiciled in the US or elsewhere. If domiciled in the US the documentation is automatic, while abroad the documentation and reporting is incumbent entirely on the taxpayer.

Owning or having signatory power over financial accounts outside the US requires filing an FBAR but that is not complicated.

 

[nun]

AFAIK the tax liability is no different for a US taxpayer if the foreign investment is domiciled in the US or elsewhere. If domiciled in the US the documentation is automatic, while abroad the documentation and reporting is incumbent entirely on the taxpayer.

Owning or having signatory power over financial accounts outside the US requires filing an FBAR but that is not complicated.

The difficulty comes in getting the right documentation and the way some foreign funds distribute capital gains vs income. To comply with PFIC rules holding foreign funds gets complicated and heavy tax penalties are applied if you get it wrong.

 

[MichaelB]

What about the PFIC rules.

They are the same for a US investor regardless of domicile.

I never meant to imply the tax rules were not complicated. They are the most complex in the world. My point was that the liability is the same for the taxpayer no matter where he/she lives. It is in fact more complicated for US taxpayer abroad because they must determine how every source of income is classified according to IRS rules, something done on their behalf in the US for the most part.

 

[Alan]

There is a tax treaty between the US and UK but I don't know if they treat each other pensions the same way.

I am a US resident and tax payer and have been receiving a private pension in the UK based on my before-tax contributions before I emmigrated to the USA.

When I first started receiving the pension tax witholdings were made until I had applied for a certificate from the US IRS and filed it with the appropriate form to the UK IRS. This showed that I am a US tax payer and the UK IRS then informed my pension provider to stop all witholdings and refund what they had already taken. I pay US taxes on those UK pension payments which means that I never have paid UK taxes on those contributions.

I don't know if the reverse is true. i.e. Does a UK taxpayer have to pay US taxes on any US pensions he receives, UK taxes, or both?

 

[nun]

They are the same for a US investor regardless of domicile.

The US tax laws are the same for a US citizen regardless of domicile, but the IRS treats non-US domiciled mutual funds very differently from US based mutual funds so it's generally a bad idea for a US citizen to invest in PFICs. This obviously limits the local investments that a US expat can make. For practical purposes they are limited to interest bearing accounts, individual stocks, shares and bonds and various pensions.

 

[nun]

I am a US resident and tax payer and have been receiving a private pension in the UK based on my before-tax contributions before I emmigrated to the USA.

When I first started receiving the pension tax witholdings were made until I had applied for a certificate from the US IRS and filed it with the appropriate form to the UK IRS. This showed that I am a US tax payer and the UK IRS then informed my pension provider to stop all witholdings and refund what they had already taken. I pay US taxes on those UK pension payments which means that I never have paid UK taxes on those contributions.

I don't know if the reverse is true. i.e. Does a UK taxpayer have to pay US taxes on any US pensions he receives, UK taxes, or both?

I think it depends on citizenship. Article 17 of the tax treaty provides for the country of residence to be the only one to tax pension income, however, if you are a US citizen the savings clause comes into effect. So a UK taxpayer who is not a US citizen would not pay US tax on pension income irrespective of where the pension was held, just UK tax. A UK tax payer who is a US citizen would have to pay US tax on pension income and also UK tax, although there would be a credit for tax paid in one country in the other country.

 

[Alan]

Thanks nun. I appreciate you sharing your research.

 

[MichaelB]

The US tax laws are the same for a US citizen regardless of domicile, but the IRS treats non-US domiciled mutual funds very differently from US based mutual funds so it's generally a bad idea for a US citizen to invest in PFICs. This obviously limits the local investments that a US expat can make. For practical purposes they are limited to interest bearing accounts, individual stocks, shares and bonds and various pensions.

I agree and appreciate your taking to time for this exchange.

 

[MichaelB]

True, but during the first six or seven years I kept saying "just one more year .... " so there was never a feeling of permanance and even after nearly 20 years, that's less than half the time I hope my retirement will last.

I know exactly the feeling and hope your choice works well for you.

 

[MichaelB]

Most of my/our assets are in HKD - which is pegged to the USD. The great fear/expectation is that at some stage the peg will either be removed or adjusted and the HKD. If that happened today,the HKD would most likely appreciate quite a bit as a result meaning I would take a hit on my non-HKD investments (and the HKD value of my local investments would probably also decline as well). I would probably end up paying higher interest rates on my mortgages as well (all floating rate).

People have been speculating on the demise of the HKD/USD peg since it was first introduced so this is a long standing issue.

The currency peg makes it a bit easier, although inflation must be pretty high. Everything I have read says real estate is very pricey in Hong Kong.

 

[DangerMouse]

FBAR is easy to do yourself.

Re the tax issue, we will continue to employ a US based accountant to do our taxes here. Main reason for doing so is the IRS appears to be the most unreasonable tax authority in the world so one does not want to get on their wrong side.

We will probably align ourselves to be taxable in Australia. The Australian Tax Office is probably one of the best tax authorities in the world to deal with. When you call them you can actually get an answer that is likely to be correct and if you do stuff up they are not going to hound you until you kill yourself unlike the IRS.

However, we have gone down the route of simplifying our holdings as much as possible. Outside the US we are cash only with the exception of pension holdings. As soon as our 401ks are withdrawable without penalty we will take them and convert to cash in Australia.

We are actually even thinking about giving back our Green Card and cutting all ties to the US to simplify our tax life as we do not see a future here for us.

 

[kcowan]

Lots of good info out there. I'd start with the Kaderli's web site and ebook (at Retire Early Lifestyle. Then there are web boards for specific areas: check out the forums at chapala.com and if interested in San Miguel do a search for "Falling in Love with San Miguel" where there's a great forum (and an eponymous book well worth reading).

In addition, there is also Mexico Expat Forum for Expats Living in Mexico - Expat Forum For Expats, For Moving Overseas And For Jobs Abroad
and for PV there are four local boards, with VallartaScene being the most popular.

 

[NYEXPAT]

We are actually even thinking about giving back our Green Card and cutting all ties to the US to simplify our tax life as we do not see a future here for us.

Make sure you look into this FIRST!

Expatriation After June 16, 2008

If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions.

Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than:

$139,000 if you expatriated or terminated residency in 2008.

$145,000 if you expatriated or terminated residency in 2009 or 2010.

Your net worth is $2 million or more on the date of your expatriation or termination of residency.

You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.

 

[NYEXPAT]

I imagine the inflation rate for dollar based services, like rent, must be pretty high.

I have a 4 bedroom 3 1/2 bath 140 sqm apartment in a brand new building 3 blocks from the Pacific Ocean in the highest rent district in Peru.

Last year when the building was first constructed the apt was priced at $140,000.00 USD., we offered/she accepted $650.00/mth (paid $7800 in cash).

Last month we signed a new lease and the rent increased 10% to $720.00, however the apt is valued at $180,000.00 and we pay our rent monthly instead of in advance.

Many central banks in SA are trying to manage the strength in their currencies by using reserves to buy Dollars and lowering or halting increases in interest rates as the influx of investors/ currency speculators is becoming a problem. Inflation at 7% is more a problem in Brazil as here as well as Chile and Colombia we are in the sweet spot of 3.5% and growth in GDP this year between 6.5-7.5%.