Retiring abroad is a great way to enjoy the life of your dreams. You waited long for it and saved up to ensure it would be all you hoped. Although your life may have slowed down and you can relax more, there is one thing you have not escaped—the U.S. federal income tax.
Even though you are living in expatriate retirement, you still must pay income taxes, whether from the United States or a foreign source. The Internal Revenue Service (IRS) states that the things you must pay taxes on remain mostly the same. You will still pay taxes on your earned income, estate, retirement income, gift tax returns, and more.
Expats still use IRS Form 1040 to file their U.S. taxes. Other forms may also be needed, depending on your situation, various accounts, and whether you claim exemptions.
The IRS does allow some exclusions for income earned abroad. They allow some people to get a foreign housing exclusion and/or a foreign housing deduction if they have income from a foreign country.
Being a resident of that country and having lived there for at least one tax year—without interruptions—qualifies you for the exclusion. Short trips are permissible, but you must return.
Another option is that you are a resident alien with citizenship in a country with an income tax treaty with the United States, and you must live there for an entire tax year. A third option is that you must be a U.S. citizen or a resident alien of the United States, who is in one or more foreign countries for a minimum of 330 days in 12 months.
A Deadline Extension
U.S. citizens living abroad have a two-month extension to file their taxes. USTaxHelp says that even though you have this extension, it is only to file your paperwork. If you have any tax debt, it must be sent by April 15—after which the debt starts earning interest.The Foreign Earned Income Exclusion
The IRS allows you to have some of your earned income from a foreign country excluded from taxation. It applies whether you are working for a company or are self-employed. The exclusion helps you avoid double taxation, but there is a limit to how much you can exclude. In 2024, the limit is $126,000. Qualifications for the exclusion are proving you are a bona-fide resident of that country or proving that you meet the physical presence test.Income From Nearly All Sources Must Be Reported
Almost all income you receive while retiring abroad must be reported on your annual tax forms. Wise says it includes money earned on dividends, rent, scholarships, interest, gambling, and capital gains.Foreign Bank Account Reporting (FBAR)
When you have retired abroad, the IRS also wants to know about your financial accounts. The information must be submitted to the Report of Foreign Bank and Financial Accounts (FBAR) on Form 114 from the Financial Crimes Enforcement Network (FinCEN).Related Stories
One qualification that makes it unnecessary to file this form is if the total amount in all your accounts is less than $10,000. Other conditions also make it unnecessary to report this income, including accounts owned by an international financial institution, or it is in a U.S. military banking facility, an IRA, and more.
The US Does Track Foreign Income
Just because you are living abroad does not mean that the U.S. government does not know about your income earned abroad and financial accounts. Thomson Reuters says many foreign banks and financial institutions operate under the Foreign Account Tax Compliance Act (FATCA). This agreement requires them to report the income of U.S. citizens to the IRS. The IRS also exchanges information about foreigners living here with the governments of their countries.Countries That Offer Unique Tax Breaks to Retirees
Although many foreign countries offer Americans a way to live cheaper than in America, a few countries go the extra mile to encourage Americans to retire there. TravelAwaits lists seven countries and says that Panama is the best of the best countries to retire as an American.The program, called Panama Pensionado, offers discounts of 25 percent or more on things such as utilities, doctor bills, hotels, airline tickets, and more. Qualifying couples must have a lifetime income of $1,250 monthly, and singles need $1,000 monthly.
Remember Your State Taxes
If you are required to file state taxes, remember to file them on time, too. You may also need to file taxes on your foreign-earned income. Otherwise, you will owe interest and need to pay more than you want to.How to Escape Paying US Taxes
If you do not wish to pay more taxes to the United States, one way to do it would be to renounce your U.S. citizenship. Before you can do this, you need to pay any back taxes you owe and your taxes for the current year.The GreenbackTaxServices says that this process involves several steps. You would need to get a passport from a foreign country, fill out some forms, attend a renunciation meeting, file your last tax form, and pay $2,350 for renunciation. If you keep any accounts in the United States, you must continue to pay taxes on income from them. Once you have renounced your citizenship, you cannot be reinstated.
When you have retired abroad, you should stay up to date on the annual changes in American expat taxes. You can find help from various tax agencies in the United States that offer help to retired Americans living abroad.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
