Heading Main

If you and your spouse have decided to retire to another country, or perhaps you’re pulling up stakes to move overseas for a job opportunity, it’s in your best interest to consider the income, gift and estate planning tax consequences of making such a move.

Effects on income and estate tax

If you’re a U.S. citizen, you’ll still owe U.S. income tax, even if you’re earning the money abroad. The United States taxes you on your worldwide income, not just your U.S. income. Because you’ll likely also owe income tax to the foreign country where you reside, you’re effectively facing a double tax hit.

At least you can generally offset some U.S. income tax with a credit for taxes paid to a foreign country. Furthermore, you may qualify for a foreign earned income exclusion. The amount for 2022 is $112,000.

To qualify, you must spend at least 330 days out of the country during a 12-month period. Also, you may be eligible for a foreign housing exclusion. And, if the country where you’re residing has a binding treaty with the United States, you may benefit from a reduced tax rate there.

Similarly, you can’t avoid gift and estate tax consequences just by moving abroad. As with income tax, your worldwide assets are still subject to federal gift and estate tax. So, if you buy a home abroad and suddenly die, the home is included in your taxable estate. Again, depending on the law of the foreign country, it could be a double tax whammy.

Outcomes of becoming an expatriate

One possible way to avoid double taxation is to renounce your citizenship and become an expatriate. This isn’t a decision to be made lightly, especially if you envision returning full time to the United States at some point. But it does put you in a position to obtain some tax relief.

When you become an expatriate, you no longer have to pay income tax on worldwide income. Your U.S. tax obligations are limited to earnings from sources within or connected to the United States. This may reduce your overall income tax exposure.

Comparable rules apply to your taxable estate. But you don’t simply get a free pass if you’re treated as a “covered expatriate” for tax purposes.

Notably, you’ll be assessed an exit tax if you’re still earning a living and you were a U.S. citizen or permanent resident for at least eight of the last 15 years. For 2022, the exit tax applies to an expatriate who:

• Has had, for the last five years, an average income tax liability exceeding $178,000,
• Has a net worth of $2 million or more, and
• Fails to certify compliance with all U.S. tax obligations for the preceding five years.

Briefly stated, covered expatriates are treated as if they’d sold all their worldwide assets at fair market value. This can result in a significant tax liability, especially when you add in the value of retirement accounts.

Saving grace: There are several key exceptions to the exit tax. The most prominent is a generous inflation-indexed exclusion on unrealized gain ($767,000 for 2022).

Finally, if you renounce your citizenship, you forfeit the benefit of the gift and estate tax exemption. For 2018 through 2025, the exemption is $10 million, indexed for inflation ($12.06 million in 2022). Instead, you’re stuck with a relatively paltry $60,000 exemption for nonresidents.

Preserve your assets

Developing asset protection strategies is a vital component to your estate plan because the more assets you can hold on to, the more you’ll be able to pass on to your heirs. Moving overseas may subject your assets to additional taxes. Discuss your plans with us before making your move.

© 2022