Taxation abroad in retirement

[Ed_The_Gypsy]

This popped up in Yahoo's personal finance area:

The Most Tax-Friendly Places to Retire Abroad - Yahoo! Finance

I was surprised to see that Mexico and Colombia both tax on world-wide income and also foreign retirement income. Mexico is unwelcome news to me.

It says that Uruguay does not tax foreign retirement income, but the talk in an expat forum for Uruguay suggests that a new law may change that. It is hard to get definite interpretations in Uruguay.

Interesting stuff. Some things I can confirm. Things change, too.

The lesson is, do your homework. Nobody needs trouble with a taxing authority where you are unfamiliar with the system, the laws and the language.

 

[nun]

The lesson is, do your homework. Nobody needs trouble with a taxing authority where you are unfamiliar with the system, the laws and the language.

Articles like this should always start with a statement saying that a US citizen is taxed by the IRS on their worldwide income no matter where they live so that leaving the US will not reduce your tax bill, but it will make your tax returns considerably more complicated as you have to comply with two tax codes and the relevant tax treaty. This isn't so for other nationalities as almost all other countries tax based on residence. This is a case where it's bad to be a US citizen.

A foreign country may have friendly tax laws, but the IRS is very unfriendly when it comes to the rules that govern the foreign investments and accounts of US citizens and the fines for incorrect filing are steep.

 

[MichaelB]

High foreign taxes that are not on qualified income is the nightmare scenario because those are not creditable against US taxes. It isn't always easy to get solid information about other country's tax systems. The big accounting firms sometimes publish summaries that are available on the web.

Taxpayers residing overseas have a biog challenge, though, as Nun points out. The regulations are very complex, and they change often and tax prep SW does not help much.

 

[Ed_The_Gypsy]

nun, I don't think we are not talking about the same thing here.

The case in point is passive retirement income, not wages. Some places do not tax pensions or passive earnings of retirees. I was amazed to read that Mexico does, and I intend to check on that.

The message is that one cannot simply retire and relocate just anywhere warm and ignore the local Hacienda, but there are places that are more retiree-friendly than others.

I am acquainted with working outside the US, as I have been doing so for many years. First I pay local income and business taxes, then I file/pay US income taxes. Always.

If I ever retire south of the border, I have no intention of working, so no wages/earned income, and I certainly do not want to go somewhere that wants to tax my pittance of SS, pension and passive income from my retirement accounts. I will pay US taxes, but I do not want to pay, for example, Colombian income tax AND US income tax.

 

[MichaelB]

The message is that one cannot simply retire and relocate just anywhere warm and ignore the local Hacienda, but there are places that are more retiree-friendly than others.

Gypsy Ed, this is a good point, and from experience, not simple or easy to deal with. Local country tax law may treat non-domestic income differently for citizens and non-citizens. Uneven enforcement and weak audit tools lead some to assume that evasion is the norm, but that could have bad consequences. The comment I made earlier about big accounting firms info on tax systems also has shortcomings, as they tend to focus their analyses toward US expats with tax protection schemes, not "real expats" - people intending to live permanently in another country.

Finding information that describes local tax systems for the expat is not easy but critical to the choice of location.

 

[Ed_The_Gypsy]

Us working expats have more complicated taxes, for sure! I am anxiously waiting to see how this past tax year will sort out.

All this reminds me that there is another advantage to being a Perpetual Tourist. Tourist visas for a month or three are common and they don't hit tourists with income tax. Just keep moving!

Now, I am going to see what I can learn about Mexico taxing retirement income.

Cheers,

Ed in Abracadabra

 

[nun]

The message is that one cannot simply retire and relocate just anywhere warm and ignore the local Hacienda, but there are places that are more retiree-friendly than others.

If I ever retire south of the border, I have no intention of working, so no wages/earned income, and I certainly do not want to go somewhere that wants to tax my pittance of SS, pension and passive income from my retirement accounts. I will pay US taxes, but I do not want to pay, for example, Colombian income tax AND US income tax.

Agreed, local tax and how it interacts with US taxation are must knows for the expat. However, simply looking at the local tax code might well be insufficient to find out how you will be taxed as any tax treaty with the US that has to be considered too. If there's no treaty it could get nasty fast.

This is particularly important for pensions and SS. I've looked into this for the US citizen ordinarily resident in the UK. There's no tax in either country until distributions are made and then the US citizen has to pay US tax and UK tax on income brought to the UK from US company pensions, 401k etc, but can take credit for foreign tax paid so in aggregate you pay the greater of the two tax rates. Interestingly SS payments are only taxable in the UK.

 

[NYEXPAT]

nun, I don't think we are not talking about the same thing here.

The case in point is passive retirement income, not wages. Some places do not tax pensions or passive earnings of retirees. I was amazed to read that Mexico does, and I intend to check on that.

The message is that one cannot simply retire and relocate just anywhere warm and ignore the local Hacienda, but there are places that are more retiree-friendly than others.

I am acquainted with working outside the US, as I have been doing so for many years. First I pay local income and business taxes, then I file/pay US income taxes. Always.

If I ever retire south of the border, I have no intention of working, so no wages/earned income, and I certainly do not want to go somewhere that wants to tax my pittance of SS, pension and passive income from my retirement accounts. I will pay US taxes, but I do not want to pay, for example, Colombian income tax AND US income tax.

You also need to consider "total tax burden" in your calculations for apples/apples comparison just like moving across state lines.
Items such as:
1. State/City/Local taxes
2. Real Estate taxes
3. Sin Taxes
4. Utilities taxes
5. Energy taxes
6.Personal property taxes
7. Sales Taxes
8. VAT

 

[Ed_The_Gypsy]

Yeahbut...there ain't no palm trees in the UK. And the rain is cold. And for beaches you have...Dover and Blackpool. Still, the people who rob you will speak English, which is appreciated.

More late....

 

[nun]

You also need to consider "total tax burden" in your calculations for apples/apples comparison just like moving across state lines.
Items such as:
1. State/City/Local taxes
2. Real Estate taxes
3. Sin Taxes
4. Utilities taxes
5. Energy taxes
6.Personal property taxes
7. Sales Taxes
8. VAT

I'd add the cost of healthcare. There's an interesting wrinkle for the US expat who is of Medicare age. If you go over seas and stop paying Medicare, if you return to the US you'll find that your medicare premium will have increased by 10% for every year you weren't paying your premiums.

 

[nun]

Yeahbut...there ain't no palm trees in the UK. And the rain is cold. And for beaches you have...Dover and Blackpool. Still, the people who rob you will speak English, which is appreciated.

More late....

True, but I think of being in the US as being abroad and the UK as home, which makes it seem a lot warmer.......at least psychologically. FYI here are the beaches I'll be going back to in NE England

 

[aida2003]

Not to hijack a thread among the knowledgeable people, but maybe you can help. This is for my curiosity ONLY right now.

Can you recommend any good expat websites that maybe discuss taxes and estate? My googling didn't turn up anything good.
Also, how could I research our tax situation if we moved to Germany? I'm just curious. We might end up dreaming about moving back to the EU instead of moving there for real.
One dream is to leave the US in 10 years and DH (who's the citizen of Germany) would work there for a few years before fully retiring and another dream is to retire there. We're both GC holders here (which probably is the same as being the US citizen for the IRS purposes), but DH is considering to apply for the US citizenship as well.
I'd like to get a general picture what we'd be against to continue dreaming or banning them completely due to costs in either place.

PS. My pal who had a dual citizenship (U.S. and Slovakia) moved to Germany after getting married to a German man said that she files her income taxes in German and the US, but didn't mention how the bottom line plays out like how much more in taxes she ends up paying now and whether she gets a check in the mail from the USA, etc. I'm sure she's too young to care how her 401k or Roth IRA yet....and I'm curious to at least to explore.

Thank you.

PPS. On the thread about the teacher in the UAE someone mentioned about the FEIE or something. Is this applicable to the US citizens living and working the EU because the above mentioned friend didn't mention it to me?

 

[nun]

One dream is to leave the US in 10 years and DH (who's the citizen of Germany) would work there for a few years before fully retiring and another dream is to retire there. We're both GC holders here (which probably is the same as being the US citizen for the IRS purposes), but DH is considering to apply for the US citizenship as well.
I'd like to get a general picture what we'd be against to continue dreaming or banning them completely due to costs in either place.

PS. My pal who had a dual citizenship (U.S. and Slovakia) moved to Germany after getting married to a German man said that she files her income taxes in German and the US, but didn't mention how the bottom line plays out like how much more in taxes she ends up paying now and whether she gets a check in the mail from the USA, etc. I'm sure she's too young to care how her 401k or Roth IRA yet....and I'm curious to at least to explore.

Thank you.

PPS. On the thread about the teacher in the UAE someone mentioned about the FEIE or something. Is this applicable to the US citizens living and working the EU because the above mentioned friend didn't mention it to me?

Look at UK-yankee.com, it's not Germany specific, but it will give you an idea of the issues. Also google US/Germany tax treaty.

Basically you'll loose your green cards if you move out of the US for long than a year without applying for special re-entry documents. Then the IRS won't tax your worldwide income, just anything that you keep in the US. Becoming a US citizen will protect your ability to return and work in the US, but will open you up to having your worldwide income taxed by the IRS and always having to file US taxes. Being a US citizen you'll never pay less tax by moving overseas, but you might pay more if you move somewhere with higher taxes than the US.

The FEIE applies to any foreign earned income, ie anywhere outside of the US.

 

[Ed_The_Gypsy]

True, but I think of being in the US as being abroad and the UK as home, which makes it seem a lot warmer.......at least psychologically. FYI here are the beaches I'll be going back to in NE England

Nice!

But the white stuff in the water is ice.

I understand an affinity to the homeland. But for me, the Swamps of Home are Beautiful to See...from Far Away.

 

[Ed_The_Gypsy]

Update: Mexico has a variety of visas (being updated) that include a generous FM3 (former name; 'tourist' visa, renewable annually for 5 years). It appears that maintaining a home residence/address in the US identifies one as a non-resident and SS and pension from the US are not taxed in Mexico. Most people don't stay 5 years anyway. Who knows? In five years, maybe the horse will sing.

 

[FreqFlyer]

The case in point is passive retirement income, not wages. Some places do not tax pensions or passive earnings of retirees. I was amazed to read that Mexico does, and I intend to check on that.

The message is that one cannot simply retire and relocate just anywhere warm and ignore the local Hacienda, but there are places that are more retiree-friendly than others.

I am acquainted with working outside the US, as I have been doing so for many years. First I pay local income and business taxes, then I file/pay US income taxes. Always.

If I ever retire south of the border, I have no intention of working, so no wages/earned income, and I certainly do not want to go somewhere that wants to tax my pittance of SS, pension and passive income from my retirement accounts. I will pay US taxes, but I do not want to pay, for example, Colombian income tax AND US income tax.

When I'm assigned my tax advisor for Mexico I'll ask about income taxes on pensions and foreign non-wage earnings.

My understanding is that Mexico, like the USA, charges income tax on world-wide income for Mexican nationals. If you're a long-term resident of Mexico but don't plan to obtain citizenship you wouldn't be subject to income tax by Hacienda (as long as you don't earn it in Mexico).

I think most retirees in Mexico stay on a no-inmigrante (rentista) visa. It's good for a year and then can be renewed each year.

 

[nun]

Update: Mexico has a variety of visas (being updated) that include a generous FM3 (former name; 'tourist' visa, renewable annually for 5 years). It appears that maintaining a home residence/address in the US identifies one as a non-resident and SS and pension from the US are not taxed in Mexico. Most people don't stay 5 years anyway. Who knows? In five years, maybe the horse will sing.

Yes, the long term "tourist visa" is used by many countries to attract retirees. However, keeping the house in the US will probably keep you liable for state taxes as well as federal.

I've heard of interesting real estate ownership laws for non-Mexican citizens in certain regions as well, that require the setting up of trusts, which triggers the foreign trust section of the IRS code.....yuck!

 

[theOAP]

Can you recommend any good expat websites that maybe discuss taxes and estate?

You mentioned estate, so I'm assuming you're talking about inheritance tax. It is difficult to find many articles for expats on this subject. Every country has their own rules, and the rules may overide tax treaties. The basis is 'Domicile', which is in practice accurately undefinable until you actually die (and this is not a joke).

Here's one example of an inheritance tax solution. Granted, it is extreme, but includes Germany.

Google:
Estate Planning for the Multinational Couple: It’s a Small, But Complex World

It's the article by Leigh-Alexandra "Leigh" Basha, on the Holland & Knight LLP site.

Sorry, but there are no prizes for still being awake at the end of the article.

 

[MichaelB]

You mentioned estate, so I'm assuming you're talking about inheritance tax. It is difficult to find many articles for expats on this subject. Every country has their own rules, and the rules may overide tax treaties. The basis is 'Domicile', which is in practice accurately undefinable until you actually die (and this is not a joke).

Here's one example of an inheritance tax solution. Granted, it is extreme, but includes Germany.

Google:
Estate Planning for the Multinational Couple: It’s a Small, But Complex World

It's the article by Leigh-Alexandra "Leigh" Basha, on the Holland & Knight LLP site.

Sorry, but there are no prizes for still being awake at the end of the article.

Is this the article? Holland & Knight - Private Wealth Services Newsletter - October 2010 - Estate Planning for the Multinational Couple: It’s a Small, But Complex World

 

[theOAP]

Is this the article? Holland & Knight - Private Wealth Services Newsletter - October 2010 - Estate Planning for the Multinational Couple: It’s a Small, But Complex World

Congrats on getting the link to work. The link would vanish when I tried to paste it.

 

[aida2003]

Thank you, guys, for the info. Maybe I'm wrong, but I think Nun is a guy, too, no?
I'll have to check out this stuff. It will give me an idea at least. Trusts and inheritance taxes will be the last to look at. Domicile is also very complicated for GC holders even here in the US. And unless our children decide to live outside the US, I intend to keep my GC current until the death sets us apart

 

[nun]

Inheritance is a really tricky area. Foreign wills are often not recognised. So the current advice for a US expat is to have 2 wills, one US and one for where you live.

 

[aida2003]

Is this the article? Holland & Knight - Private Wealth Services Newsletter - October 2010 - Estate Planning for the Multinational Couple: It’s a Small, But Complex World

Well, I suppose this article or its snippets might be applicable to our family except for the size of the estate. Too bad, now I'll have to read and not fall asleep. Thank you.

 

[aida2003]

Inheritance is a really tricky area. Foreign wills are often not recognised. So the current advice for a US expat is to have 2 wills, one US and one for where you live.

I'm afraid I agree with you. It's probably best to start gifting to the kids during our lifetime when they're adults. OTOH, if they turn out the way I hope they should, then there're charities.

 

[nun]

Thank you, guys, for the info. Maybe I'm wrong, but I think Nun is a guy, too, no?
I'll have to check out this stuff. It will give me an idea at least. Trusts and inheritance taxes will be the last to look at. Domicile is also very complicated for GC holders even here in the US. And unless our children decide to live outside the US, I intend to keep my GC current until the death sets us apart

I'm a guy

Domicile is a status that is decided on a case by case basis as it depends on where you were born, your parents' nationality and how you are living your life.

To keep that GC you have to stay resident in the US.