US Taxes for Foreign-based ERs

[ESRBob]

I know US citizens living abroad have a certain amount of slack -- $80k or so -- before they need to pay US income taxes. But does that apply to your earnings on investments too, or is it just for income. If you were to retire in Dominican Republic or Thailand, for instance, would you pay your capital gains and dividends taxes to those local countries, or only to the US?

Also I presume you get your social security checks wherever you are?

I am starting to realize that ERing overseas could solve a lot of long term headaches including paying state income taxes and property taxes for all the state and local employees pensions and healthcare in their retirements, having affordable nursing and healthcare in our old age and using BUPA for affordable health insurance now, dodging these incredible property taxes here... are there some financial gotchas that I am forgetting about?

Maybe its time to start talking to the wife about the pleasures of Costa Rica or Thailand?

Is there going to be a mass exodus of boomers from the US to places like central america and Dominican Republic in about 20 years when other people figure this out, and realize that cell phones and DSL lines and hospitals and so forth all work down there, unlike our impressions from just a few years ago? My friend has been ER in Guatemala now for 4 years and loves it. I wonder if buying up real estate in expat-friendly places is going to be the 'play' over the next few years.

Anybody have relevant experience thinking along these lines?

 

[JOhn Galt]

We considered leaving the friendly confines
(of the USA). Discarded the idea for a bunch of reasons
which I have posted before. I think if you do this it is much easier if you are younger. One of the reasons
we dropped it is that it seemed like too much hassle.
I just wouldn't have the energy to deal with all those
changes any more.

John Galt

 

[Skylark]

I can't speak directly to the tax question. One thing that I found looking at http://www.escapeartist.com is that the cost of living in poorer countries is often not as low as you would first think. Even real estate is not always the big bargain that you would expect. You could find some areas in the US with low real estate costs as well. Although they may not have the good weather!

The biggest factor in being able to live cheaply seems to be lifestyle. If you choose a low cost lifestyle in the US, you can live very cheaply as well. For example, one article about Mexico said that you can live on $500 or $1000 a month, but to be comfortable you would probably want $1500 to $2000 a month. I think there are many here that can attest to living comfortably on less than $2000 a month in the USA.

Also, escapeartist.com is kind of a wierd site, it seems to have an anti-USA slant without ever stating why. It seems to be more marketing than substance. The BS meter starts indicating in the red when I read it.

 

[Peter]

ESRBob, I have looked into this since I may choose to return to the UK at some point (I have dual nationality).

The situation is very complex, but there are some answers in one of the IRS FAQs:

http://www.irs.gov/publications/p54/index.html

One thing that makes a big difference is whether or not there is a tax treaty between the US and the target ER country. In the case of the UK, there is such a treaty ...

http://www.inlandrevenue.gov.uk/pdfs/ukusa_dtconvention.pdf

Basically, this says that if you are a US citizen resident in the UK, you pay UK taxes on pretty much everything. However, there are exceptions, estate tax is one, I believe, so this is one area where professional advice is probably a good idea.

You do have to file a US tax return every year, although typically no money is due.

And, yes, you do get SS benefits from the US.

Peter

 

[haha]

And, yes, you do get SS benefits from the US.

But no Medicare outside US, right?

Mikey

 

[Peter]

But no Medicare outside US, right?

Mikey

Yes and no. Medicare won't pay for treatment overseas, but if you return to the US and have been paying the monthly premiums, I think you are covered.

Another link on this:

http://www.businessweek.com/2000/00_29/b3690027.htm

However, depending on where you are living, you might choose to be treated locally. The NHS in the UK comes in for a fair amount of criticism, but people I know have been very satisfied with their level of care.

Peter

 

[Red-y]

I am also planning on ER in another country and have done some research on the taxation question. My choice of foreign locale is Canada, however. They speak English and drive on the "right" side of the road

Most countries tax based on RESIDENCY--if you live there, you pay taxes on your income regardless of where it's derived.

The US taxes based on CITIZENSHIP--no matter where you live, as long as you remain a US citizen, you must file a tax return forever.

As I understand it, the way it works is that you file your tax return in the non-US country of residence, then file your US tax return. You tell the IRS about your worldwide income, but you can then claim the foreign tax credit for the taxes you paid in the country of residence.

In this way, you are not taxed on the same income twice. But it does have the potential to be a giant PIA, so John Galt is probably right on in avoiding it.

I think the $80K exemption only applies to salary/wages earned while you are on a temporary assignment overseas but still maintaining your US residency.

I'm 47 and plan to be in Canada in 3 years...I just put in my application for Permanent Resident status a few weeks ago.

 

[ESRBob]

Red-Y and Peter,
Thanks for this info, and I will look at the sites you refer to. I guess this means it is worth finding out the capital gains and dividend/interest taxes on some of these foreign locales, Thailand and Costa Rica and so forth -- since that is where they are going to be taxed. I guess that is how people get themselves into offshore tax havens and so forth... Just when I thought I had the US tax thing figured out it all gets a lot more complicated!

 

[dory36]

I lived overseas (Saudi) before ER. Some rules may have changed since I left (5/2001), but probably not much.

If I recall correctly... The $80k (it was $70k when I was there) applied to foreign earned income only, not investment income. So if you earned $20k and made $60k on investments, you'd only get the $20k excluded.

There were two ways to qualify.

A - you spent a minimum of 335 days (or maybe 330) outside the USA during a period of 365 continuous days (such as June 1 to May 31, with a 30 day vacation is OK). For the initial partial year, they prorate the deduction.

B - you maintain a bone fide home outside the US continuously from 1/1 to 12/31, regardless of how much time you spent in the US.

Everyone I knew did plan A the first 12 months and then switched to plan B, for obvious reasons. The company would not allow business or vacation trips back to the US until 335 days after you arrived to keep your eligibility for rule A intact.

And, yes, you do get SS benefits from the US.

SS, VA, and other pension-type benefits still come to you. However, for you young dreamers, while working outside the US you didn't earn any SS credits (or pay FICA).

 

[Lancelot]

I agree with Dory 36 about the Foreign Earned income exclusion and receiving payments (SS, VA, etc) abroad.

About taxes in Thailand, I pay my US Income taxes as if I were living in the US. In other words, as long as one is a US citizen, he or she pays US Income Tax, regardless of where one lives.

In Thailand, my understanding is that US citizens working here pay some Thai income tax, but that amount can be credited against your US Income Tax liability. Since I am retired, I have not paid any Thai income taxes, only the 7% "VAT" included in most goods and services I purchase. Your gona pay "sales taxes" anywhere, so its no big deal.

Yea, living abroad can definately be cheaper-I live comfortably in Thailand on $1k US per month, but don't go abroad only for the low cost of living. I hear about many folks living a comfortable lifestyle in the US for $20-25K annually. We can't always control (increase) our income, but we can control our spending. Spending -IMHO- is the biggest lever we have in ER.

Want your time to be your own? Control spending and ER. Want all the latest toys? Get back on the wage (and tax) treadmill.

ER sure works for me

 

[Hyperborea]

In other words, as long as one is a US citizen, he or she pays US Income Tax, regardless of where one lives.

It's actually a bit worse than that for US citizens/long term residents (i.e. green card holders). If you decide to give up citizenship/residence then as an early retiree with likely a good sized stash of cash you will be assumed to be doing so for tax reasons and will owe US taxes for 10 more years. The US is one of the few countries in the world to tax their citizens no matter where they live - most countries tax based on residence.
http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html

In Thailand, my understanding is that US citizens working here pay some Thai income tax, but that amount can be credited against your US Income Tax liability. Since I am retired, I have not paid any Thai income taxes, only the 7% "VAT" included in most goods and services I purchase. Your gona pay "sales taxes" anywhere, so its no big deal.

So you haven't paid any Thai income taxes? My understanding was that capital gains were not taxable in Thailand only if the gain was made outside Thailand and not brought back to Thailand in the year that the gain was realized. Any input on this? Any suggestions on information on Thai tax law?

Thanks

 

[Lancelot]

So you haven't paid any Thai income taxes? My understanding was that capital gains were not taxable in Thailand only if the gain was made outside Thailand and not brought back to Thailand in the year that the gain was realized. Any input on this?

Nope, I did not pay any Thai income taxes, because i have no earned income in Thailand. Yes, all of my capital gains, dividends and interest are generated in the US.

I did wire some funds into a Thai bank account, to meet the minimum "financial" requirement to retire here. I continue to keep 99.5% of my portfolio in US based investment firms.

About Thailand and tax issues, try visiting www.thaivisa.com

All the best,

Lance