Do you have to Pay US Taxes if you Retire Overseas?

Do you have to Pay US Taxes if you Retire Overseas?

Thousands of Americans retire overseas every year, while millions more are interested in retiring overseas and are actively researching possible destinations online.

The benefits of retiring abroad are numerous, including, depending on where you retire, a warm climate, a better quality of life, a sense of adventure, and more affordable healthcare.

Americans who are thinking about it, and those who have already retired abroad, should be aware though that the US taxes based on citizenship rather than on residence the way most other countries do, which means that they will have to continue filing US taxes after they move, reporting their worldwide income.

They may also have to file taxes in their new host country, depending on the tax and residency rules there. Americans thinking about retiring abroad should always research the tax rules in potential destination countries beforehand, as these can have a real impact on their finances. For example, according to Bright!Tax, the best online tax filing for expats website, income distributions from retirement plans that aren’t considered taxable in the US may be considered taxable by the country where you retire.

The tax treaties that the US has signed with other countries don’t alleviate this requirement to file US federal taxes (and expats who lived in certain states may have to continue filing state taxes too). Instead, to help prevent double taxation, the IRS has made available a number of exemptions that expats can claim when they file, such as the Foreign Earned Income Exclusion, and the Foreign Tax Credit. 

Americans who retire overseas should consult with a US expat specialist who will advise them regarding the best way for them to minimize (and hopefully eliminate) their US tax bill, which will depend on which country they retire to, and their income types, sources, and levels.

In some cases expats will need to claim a number of provisions to eliminate double taxation of different income types, which may also require claiming tax credits in the country where they live, too.

In general, Americans who retire abroad tend to pay the higher of the two tax rates that they’re subject to. Americans who set up bank or other financial (such as investment) accounts in other countries may also have to report them by filing an FBAR (Foreign Bank Account Report) each year.

Americans who own property abroad should also be aware that it is taxable when the times comes to sell it the same as if it were in the US, and also that if it is purchased through a corporation or other legal structure, it will trigger further reporting requirement relating to the corporation (or trust etc), too.

Americans who have already retired overseas but haven’t been filing US taxes since they moved abroad can catch up without facing any penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.