Many are excited to travel again, with vaccination progress allowing for the lifting of COVID-19 pandemic restrictions. These trips abroad could last more than a few days, as the option of working from home is becoming more common.
You should be aware of the potential pitfalls when you consider moving overseas for a few months. Even a small oversight could cost your family thousands.
Consider the following before you stamp your passport:
The U.S Global Tax Net
You may still owe U.S. Income Taxes even though you work and live abroad. The United States is one of only two countries that tax their citizens regardless of where they live (Eritrea is the other). It is also the only country that can tax permanent residents who move to another country without reneging their green cards.
You might have heard of the Foreign tax Credit or the Foreign earned income exclusion. The Foreign Tax Credit allows you to reduce your U.S. taxes dollar-for-dollar by paying foreign taxes. However, not all tax payments are eligible. Foreign Earned income exclusion may allow you to exclude up to $108,700 from your foreign earnings in 2021. These and other strategies may lower or eliminate your U.S. taxes. However, even if your income is lower, the U.S. could still charge you huge tax bills. You’ll be charged a large lump sum, plus interest and penalties, when you file your tax return.
State taxes can be the same. Each state defines residency differently. California may consider you a resident even though you are not based there. This means that you will still have to pay state taxes.
These taxes can be owed on both your income and any income-generating properties or investments. If you purchase property abroad and rent it out, U.S. taxes will still be due, even if the foreign income was used to buy the property. You can face penalties up to 50% if you fail to disclose income or assets from overseas.
Insurance issues across borders
Your insurance policy may not cover you if your residence is abroad. This is especially true for disability insurance policies. You will need to be able to prove that you are still disabled to maintain your payouts. Losing access to this doctor could result in you being disqualified from receiving those benefits.
It’s not uncommon for insurance policies to be invalidated if they are issued overseas. If you live permanently abroad, it is important to get new coverage. Even if you are only traveling for a short time, it is worth looking into dedicated overseas insurance policies. These premiums are very affordable and can save you a lot of money on medical bills. You should also ensure that your policy covers evacuation. This will cover expenses to bring you back to the U.S. in case you require additional medical treatment.
Save for retirement
You are likely contributing to a 401k or IRA if you work in the U.S. These accounts can lose all of their tax benefits if you move abroad. Because gains in Roth IRAs, which are usually tax-free, can be a problem as many countries consider these gains taxable income, it is especially problematic. This creates a double problem for U.S. expats: the gains are locked in an IRA but you still owe tax.
What happens if you stop contributing in your U.S. retirement account and instead contribute to host-country accounts? You often get the exact same problem reversed. Although you will not owe any taxes in the host country, gains made in foreign accounts may be taxed by the U.S. The U.S. could also tax any employer matches of your contributions. When deciding whether or not to contribute to a qualified overseas account, there are many things to consider, such as how long you plan on spending abroad and where you will retire. You should research bilateral tax treaties to get clear guidance.
Similar concerns apply to Social Security benefits. A few countries have “totalization arrangements” with the U.S. which allow American expats to continue to be eligible for Social Security benefits while they are abroad. If you decide to retire abroad, these countries will allow you access their version of Social Security. This is not an option for most countries. You will not be eligible for both U.S. social security and foreign benefits.
In conclusion
Traveling and working abroad can be an exciting experience, especially for remote workers. It’s easy to make costly errors without planning.
Even if someone isn’t moving permanently, many of these issues can affect people who are only temporarily abroad for a few months. You could be affected immediately if you have the wrong type of health insurance. You will be subject to both local taxes and U.S. taxes if you work remotely unless you are on a tourist visa, which can have different consequences if you find out. These shorter-term travelers are less likely than long-term travellers to have retirement account problems. However, depending on how involved they become in the financial system of their host country (e.g. opening a bank account or claiming tax residency), they may still be in trouble.
Talking to a financial advisor who is familiar with the financial systems in both your home country and the host country can help you avoid financial setbacks. The Global Financial Planning Institute (www.gfp.institute), Society of Trust and Estate Practitioners, and Association of International Certified Public Accountants are some additional resources you should consider when looking for a financial advisor.