Planning to be an Expat

[Luv2BBQ]

Hi folks, my first post.

My wife and I are 54 and 49, and plan to retire in 5-7 years. We live in the US, and I've been doing much research on retiring overseas. I've followed "International Living" and "Live and Invest Overseas with Kathleen Peddicord."
We'll hopefully have at least 3k dollars/mo budget from pensions, IRA's and SS.
We're looking at possibly Central/Latin America, or maybe Ireland. We prefer being close to the water, with a warm climate.
I'd like to hear from any current Expats who made the move, where you settled, why you settled there, and any helpful tips for pitfalls to avoid.
Thanks in advance for any help.

 

[NYEXPAT]

Hi folks, my first post.

My wife and I are 54 and 49, and plan to retire in 5-7 years. We live in the US, and I've been doing much research on retiring overseas. I've followed "International Living" and "Live and Invest Overseas with Kathleen Peddicord."
We'll hopefully have at least 3k dollars/mo budget from pensions, IRA's and SS.
We're looking at possibly Central/Latin America, or maybe Ireland. We prefer being close to the water, with a warm climate.
I'd like to hear from any current Expats who made the move, where you settled, why you settled there, and any helpful tips for pitfalls to avoid.
Thanks in advance for any help.

Welcome from a fellow expat. Here is my advice:
1. Stop reading and believing magazines that are trying to sell retirement or real estate tours.
2. Start learning Spanish.
3. Join expat forums in your target area and avoid the "hucksters".
4 Visit your targeted locales for extended periods including there "worst seasons".
5. Research residency requirements and health care options.
6. Have multiple debit cards with 4 digit pins.
7. Sell/give away everything you own and only bring what can be packed in 4 suitcases.
8. Do not buy anywhere. Rent unfurnished and only buy what you can't live without.
9. Transfer funds to Schwab International and leave standing wire instructions they also reimburse all ATM fee's.
10.Never invest your money in anything, if you can't figure out who is the "Patsy"!
11. Look for countries with a weaker currency than your own. Charge everything and pay at the EOM to capture Dollar appreciation.

 

[CoolChange]

...
8. Do not buy anywhere. Rent unfurnished and only buy what you can't live without....

NYEXPAT is making me feel better about my own plan since he has been living the lifestyle for a while and this advise nicely sums up my plan.

The only item in the list that I do not really understand is the the one I have quoted about never buying. I have seen this several times; but, I have also seen several examples of folks who used to preach this gospel but eventually bought anyway. Paul and Vicki Terhorst, who were my introduction to the real possibilities of ER and perpetual travel, even took the plunge for a while; but, it appears that they are done with home ownership again. Maybe I should take that fact as evidence that this is good advice.

Full disclosure: I have never owned my own home; maybe it is like owning a convertible, just something some people have to do once to get it out of the system.

 

[Luv2BBQ]

Welcome from a fellow expat. Here is my advice:
...7. Sell/give away everything you own and only bring what can be packed in 4 suitcases.

NYEXPAT,
Looks like great advice in your list. I found #7 to give me a quick chuckle.

Can I ask why you chose Peru to settle?

 

[bondi688]

How do you maintain a US connection? Don't you need at least a mailing address in the US? Do you have to pay state income tax in your former state of residency?

 

[Texas Proud]

Why would you rent unfurnished

If you are going someplace to stay full time, I can see you wanting to buy your own furniture etc., but if you are going for 3 to 12 months that seems like it would be expensive buying at every stop...

 

[kramer]

How do you maintain a US connection? Don't you need at least a mailing address in the US? Do you have to pay state income tax in your former state of residency?

I live abroad and will try to answer your questions from my perspective.

No, you don't need to pay income tax in your former state of residency . . . any more than if you move to another state you don't need to keep paying income tax in your previous state.

I maintain a permanent USA address to receive snail mail (basically a forwarding company). I get an emailed picture of all the mail I receive the day I receive it. I can forward the mail to any address at any time or I can have any piece of mail scanned and emailed to me. I get almost nothing of value in snail mail anymore (and anything of value is already available online), so I only forward it to myself when I am in the USA. Maybe three times in five years I have had important items scanned, two were from the IRS. I also maintain a permanent USA phone number via Skype. My total annual costs for mail forwarding and permanent USA phone number are under $150.

I return to the USA at least once a year. Actually, I have returned twice each year to visit friends and family although I expect to visit just once in 2013 for a single longer visit. I also maintain a cultural connection by downloading movies and shows over the internet and watching them on my TV and reading books by American authors, watching USA television (my regular cable is actually mostly USA-based programming), etc.

Once you have established residency abroad you will not be forced to buy USA health insurance under ObamaCare or pay the tax penalty associated with that. Here are the IRS tests for residency abroad (and this is apparently what ObamaCare uses at its guideline -- you must meet at least one of these two criteria):

Foreign Earned Income Exclusion - Bona Fide Residence Test

Foreign Earned Income Exclusion - Physical Presence Test

I plan to file 2012 income taxes from abroad via Turbo Tax using my address abroad as my residence but using my mail forwarding address as my mailing address.

 

[nun]

No, you don't need to pay income tax in your former state of residency . . . any more than if you move to another state you don't need to keep paying income tax in your previous state.

Be careful as each state has it's own residency/domicile rules. A mailing address, driver's license etc can trigger some issues.

Once you have established residency abroad you will not be forced to buy USA health insurance under ObamaCare or pay the tax penalty associated with that. Here are the IRS tests for residency abroad (and this is apparently what ObamaCare uses at its guideline -- you must meet at least one of these two criteria):

Foreign Earned Income Exclusion - Bona Fide Residence Test

Foreign Earned Income Exclusion - Physical Presence Test

I plan to file 2012 income taxes from abroad via Turbo Tax using my address abroad as my residence but using my mail forwarding address as my mailing address.

Health care and insurance is a perennial issue for the expat. You can pay out of pocket or you might qualify for local insurance with residency. If you think you will ever return to the USA make sure you understand the implications of Medicare Part B deferral or acceptance when you reach 65.

How you are taxed will depend on where you are resident and the tax treaty in place with the USA. As a US expat you need to understand US and local tax law and their interaction. There are also sometimes restrictions on where and how you can invest that you have to understand. Also you will run into US financial reporting requirements if you have substantial offshore funds (anything over $10k).

 

[kramer]

Why would you rent unfurnished

If you are going someplace to stay full time, I can see you wanting to buy your own furniture etc., but if you are going for 3 to 12 months that seems like it would be expensive buying at every stop...

Yes, I agree. It seems like one year is about the break even point for this when all is considered, I would go unfurnished if I was pretty sure I was staying more than one year.

Also, it takes awhile to figure out where you really want to live (city and country-wise). And once there, where in the city, and then awhile to figure out how and where to buy things, etc.

I was traveling a lot for 4 and half years, lived in four countries during that time. I finally rented an unfurnished place in the Philippines when I was sure I would be there for awhile. Although I felt like I was getting married . . . also furnishing an apartment in a developing country is more work than in the USA, my place did not come with curtains or curtain rods, refrigerator, screen doors, hot water, stove, stove stand, light bulbs, A/C . . . and I had to replace all the door locks and add some security, sign a long term contract for internet and cable with deposit, knowing that my situation was finally more permanent I brought over a suitcase full of stuff from the USA on my last trip (basic tools that I owned, extra clothes and shoes that I had, . . .), etc.

When I rented furnished I never had to bother with these things.

 

[bondi688]

kramer
Thanks for the very detailed answer. I think nun may be right, some states do require you to pay state tax as the last state of residency before you live abroad unless you give up every link, including driver license.

 

[NYEXPAT]

NYEXPAT is making me feel better about my own plan since he has been living the lifestyle for a while and this advise nicely sums up my plan.

The only item in the list that I do not really understand is the the one I have quoted about never buying. I have seen this several times; but, I have also seen several examples of folks who used to preach this gospel but eventually bought anyway. Paul and Vicki Terhorst, who were my introduction to the real possibilities of ER and perpetual travel, even took the plunge for a while; but, it appears that they are done with home ownership again. Maybe I should take that fact as evidence that this is good advice.

Full disclosure: I have never owned my own home; maybe it is like owning a convertible, just something some people have to do once to get it out of the system.

My YW owns Investment properties but in the 10 years I been here, have rented 5-6 different unfurnished places. I would only own assets that throw off cash flow and have the potential for serious appreciation. As most of LAM is in a property bubble right now, I would not advise buying.

As LAM has a history of changing rather rapidly, Renting provides maximum freedom to walk away. Furnished or unfurnished is a personal choice. Furnished to American standards comes at a tremendous Premium commonly referred to as "Gringo tax". My YW's Oceanview 1600sq/ft Penthouse cost 100k and rents for $2k-4k/month. Buying locally made furniture is usually cheaper and buying from expats who failed to transition is even cheaper. If you fail, you can easily sell on the local expat website.

 

[NYEXPAT]

NYEXPAT,
Looks like great advice in your list. I found #7 to give me a quick chuckle.

Can I ask why you chose Peru to settle?

Glad you enjoyed it, if you bring a container in and see what you owe in aduanas for your junk, you'll appreciate it a whole lot more.

In general I chose "Miraflores" (a small part of Lima) for the Jungle girls,COL,Jungle girls,Climate,Cheap Ocean front property,Jungle girls,Lack of critters/bugs,Jungle girls, First world city living w/jungle girls, low cost medical care administered by beautiful young Jungle girls, Best cuisine in the America's served up by beautiful young Jungle girls,centrally located with good travel options.

I chose Peru for the convenience of hassle free "border hopping", getting off the grid, Triple/now dual currency economy, Lax regulations on moving money into or out of the country,less gov't intrusion over all.

 

[boatfishandnature]

Good list from NYEXPAT. I subscribed to International Living for a few months and cancelled... found it too superficial and optimistic.

On the other hand... my wife and I have lived in 5 countries. We find that the greatest secret is to recognize up front that every country is going to have advantages and disadvantages. It is up to us to adapt our lifestyles to make use of the advantages, otherwise you will only have the disadvantages... We enjoyed every one of the very different 5 countries.

 

[Ed_The_Gypsy]

Paul and Vicki Terhorst, who were my introduction to the real possibilities of ER and perpetual travel, even took the plunge for a while; but, it appears that they are done with home ownership again .

"How you going to keep them down on the farm after they have seen Pa-ree?"

The life of a Permanent Traveler can be addicting. Once you make that break, where do you stop? Beware the freedom of the road.

I was surprised when they bought that house. Not surprised anymore. I salute the Terhorsts. They are truly Rolling Stones.

 

[Luv2BBQ]

These are great inputs, folks. TYVM!

Does anyone have any Expat horror stories, or even an encouraging story they can share?

Any WOW (words of wisdom)?

 

[Alan]

Kramer, the links you provided on establishing bone fide and physical presence residency and the IRS forms from those links are concerned with foreign earned income.

how about if you have no foreign earned income? Are you still restricted to having to be out of the USA for 330 days a year?

Reason I ask is that we are considering moving back to the UK, but we would want to visit our kids in the USA and spend at least 3 months in the USA when we visit.

 

[theOAP]

Kramer, the links you provided on establishing bone fide and physical presence residency and the IRS forms from those links are concerned with foreign earned income.

how about if you have no foreign earned income? Are you still restricted to having to be out of the USA for 330 days a year?

Reason I ask is that we are considering moving back to the UK, but we would want to visit our kids in the USA and spend at least 3 months in the USA when we visit.

The substantial presence test from the IRS site:
Substantial Presence Test

 

[lhamo]

Kramer, the links you provided on establishing bone fide and physical presence residency and the IRS forms from those links are concerned with foreign earned income.

how about if you have no foreign earned income? Are you still restricted to having to be out of the USA for 330 days a year?

Reason I ask is that we are considering moving back to the UK, but we would want to visit our kids in the USA and spend at least 3 months in the USA when we visit.

Alan, my understanding is that if you do this in the first year after you move back to the UK, you will not qualify for the physical presence test. You may or may not qualify for the bone fide residence test -- I would be cautious and not claim it the first year. But once you have been back in the UK for a full tax year (Jan 1-Dec31), you can refile your taxes retroactively and claim the bone fide residence status dating back to the day of your move.

This is what we did when we relocated to China in 2002. We moved in February, so we weren't out of the country for a full tax year, and with a trip back in the middle of the year that blew our chances for physical presence test. So we didn't claim the FEIE. We DID claim it in 2003, however. When we filed our 2003 taxes we also filed an amended return for 2002, and got back the tax we had paid for that year as well. We had some nice tax returns come back to us in Summer 2004!

I'm not a tax professional so take this advice for what it is worth. But we haven't had any issues with the IRS since we've been claiming the FEIE (knock wood). In several years they've actually pointed out we were owed more money back than we claimed due to various tax credits, etc.

lhamo

 

[theOAP]

Easy folks, this topic has broken down into apples and oranges.

There are the bona fide residence test and the physical presence test that relate to 'earned income' under the FEIE. If you live abroad and your only source of income are pensions, interest, etc., you do not have any earned income, only unearned income, and you wouldn't be filing under the FEIE. You would only be allowed foreign tax credits or treaty exemptions. As I understand, in the case of a true retiree, your US tax presence/foreign presence falls under the substantial presence test for a US residence liability (see my previous post). That's why all the Canadian snow birds have to be very careful.

 

[Alan]

Thanks for responses to my questions folks, I expect the substantial presence test is what applies to my case.

 

[nun]

Easy folks, this topic has broken down into apples and oranges.

There are the bona fide residence test and the physical presence test that relate to 'earned income' under the FEIE. If you live abroad and your only source of income are pensions, interest, etc., you do not have any earned income, only unearned income, and you wouldn't be filing under the FEIE. You would only be allowed foreign tax credits or treaty exemptions. As I understand, in the case of a true retiree, your US tax presence/foreign presence falls under the substantial presence test for a US residence liability (see my previous post). That's why all the Canadian snow birds have to be very careful.

Excellent point. If you are a US citizen expat with no earned income you will have to use foreign tax credits and the relevant tax treaty to avoid double taxation. The FEIE is irrelevant.

Also how much you pay to the US and your residence country will depend on the type of income or gains and how it is treated in the treaty. Pensions, IRAs, ROTHs, capital gains and dividends will have to be treated separately as different levels of tax will probably apply and you'll have to account for US mandatory withholdings too.

 

[kramer]

Alan, after living in the UK for a full tax year, you could use the bona fide residence test for establishing your residence in the UK. Then you could refile those taxes and get your ObamaCare penalty back. I am assuming you would not have earned income but, if you did, you could refile with the FEIE. You can use the Bona Fide resident test even if you spend more than 30 days per tax year in the USA but read the rules that I posted carefully. The reason I posted those rules is because they are the same rules used for the ObamaCare penalty, according to what I have read.

I, like all American expats that I know or have met, pay USA income taxes on all my passive income. I have never heard of anyone paying local income taxes on passive income earned abroad (in practice). But there are a few countries that require this of permanent residents, usually after 5 years of permanent residency (France and Colombia are two examples that I know of). So you should research this for any country you are interested in. I am in the Philippines and there is no requirement to pay income taxes on money earned outside of the Philippines. If you were in this situation, you could use the foreign tax credit on your USA return for taxes paid abroad, but it is complicated and you usually don't end up ahead because taxes are paid different ways in different systems and not always fairly credited.

Because I have no earned income, the only reason I care about the residency tests is to avoid the ObamaCare penalty. This is a new complication for expats. Otherwise, my federal income taxes are identical no matter where I live.

When you leave a state and file a non-resident income tax form the following year (your last), you will probably not be able to renew your driver's license there and still claim you are not a resident (although you can probably keep your license until it expires). You can still vote there in federal elections. You can have a mail forwarding address anywhere, although I would suggest establishing that in a no-income-tax state just to be extra cautious. Personally, I established residency in Texas before leaving and I maintain a driver's license there (and it can usually be renewed remotely). But now I can use my Philippines driver's license in the USA for visits.

I buy temporary health insurance for my USA visits. I would never step into the USA without health insurance there.

 

[Alan]

Excellent info Kramer. Having a Texas driving license, have you ever been called for jury duty (in the 9 years I have lived here I have been called 3 times, and served on a jury last year).

 

[nun]

I, like all American expats that I know or have met, pay USA income taxes on all my passive income. I have never heard of anyone paying local income taxes on passive income earned abroad (in practice). But there are a few countries that require this of permanent residents, usually after 5 years of permanent residency (France and Colombia are two examples that I know of). So you should research this for any country you are interested in. I am in the Philippines and there is no requirement to pay income taxes on money earned outside of the Philippines.

If you are resident and ordinarily resident in the UK you are taxed on your worldwide income. If you are only resident you can choose to pay 30k GBP to avoid UK tax on foreign income and gains you don't bring into the UK.

For me that will be moot as I'm a US/UK citizen and When I return to the UK I will be resident, ordinarily resident and domiciled there and my worldwide income will be taxable by both the UK and the US. But the tax treaty avoids double taxation. In practice low local tax rates are meaningless for US expats because the US taxes on citizenship as well as residency.

 

[kramer]

Excellent info Kramer. Having a Texas driving license, have you ever been called for jury duty (in the 9 years I have lived here I have been called 3 times, and served on a jury last year).

No jury duty calls in 5 years. In Texas you are allowed to have a non-residence (e.g., a mail box) as your driver's license address, although you are supposed to have a residence address before that and then you can change to the mailbox address after you leave.

To register to vote, you initially need a physical address, not just a mailbox.