Retiring abroad is more popular than ever, thanks to perceptions of a better quality of life, more affordable health care, and a warmer climate.
Americans living abroad earning over $10,000 a year (or just $400 of self-employment income) are still required to file a U.S. tax return though, declaring their world wide income. This includes expats who have retired or settled permanently abroad.
Thankfully, there are several IRS exemptions that help expats to avoid double taxation, however expats still have to file a U.S. tax return to claim them.
U.S. expats may also have to report any foreign bank and investment accounts and assets that they may have.
As well as filing an annual U.S. tax return, Americans who have retired or permanently settled abroad should also be aware of the implications of living overseas on their estate planning.
Wills and inheritance
Under U.S. tax law, the jurisdiction where an asset is located will determine who inherits it, while personal property inheritance is subject to the laws of the country where the expat was domiciled. As such, wills and inheritance planning for expats varies depending on the country where the expat lives, but broadly speaking there are two scenarios.
Expats who live in a country with a legal system based on common law like the U.S. (these are typically other English speaking countries, such as Canada, the UK, and Australia) are advised to make two separate wills, one in their host country for their foreign assets (and personal property), and one in the U.S. covering their U.S. assets.
Expats who live in a country with a different type of legal system on the other hand, such as the civil law systems that most European and Latin American countries have, or an Asian system, should consult a local specialist. Countries with legal systems based on civil law often insist that assets are divided up equally between children, however a local will may still allow some discretion in terms of how a proportion of assets are allocated.
Avoiding estate tax double taxation
U.S. estate tax is applied to worldwide income and assets, including foreign property and any other overseas assets and investments.
Expats who live in a country that doesn’t have estate taxes can simply plan as if they lived in the U.S., ensuring they have a legally valid U.S. will and establishing a trust to help protect their assets if required. Complexities can arise though for expats who live in countries that have their own estate taxes, presenting the possibility that expats will have to pay estate tax on the same assets twice.The U.S. has estate tax treaties with Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Switzerland, and the United Kingdom. The provisions in these treaties vary, so expats living in one of these countries should investigate the provisions of the specific treaty when estate planning.
In most other cases, the U.S. will provide a tax credit against estate tax already paid to a foreign country.
Estate planning should take into account the legal system and estate tax rule of the country that an expat lives in. The U.S. will attempt to tax worldwide assets, but will normally provide a tax credit against estate tax paid elsewhere. Expats are well advised to make a U.S. will if they have U.S. assets, and a separate will in their home country if they have assets and depending on the local laws there. Expats may also consider setting up trusts to protect their U.S. and foreign assets from estate taxes, again depending on the laws in the country where they live. Lastly, expats are advised to set up Power of Attorney for Finances, and for Health Care, as well as a Health Care Directive (instruction in case of emergency), ensuring that these are legally binding in the country where they live.