Understand the tax and estate planning implications of moving abroad

There are many good reasons to move abroad, such as retirement or to begin a new career. But before you finalize your plans, a thorough review of your financial and estate plans is in order. Let’s take a look at what areas to focus on.

What are the income tax implications?

U.S. citizens and permanent residents (green card holders) generally are subject to taxes on their worldwide income, even if they’re living and working abroad. This raises concerns about double taxation — by the United States and a foreign country — of the same income. Depending on the country, you may be able to claim a credit against U.S. taxes for taxes you pay to a foreign jurisdiction. Also, some countries have tax treaties with the United States that entitle you to a reduced foreign tax rate.

There may be tax planning strategies you can use to minimize your overall tax bite. For example, the United States provides exclusions from income for a certain amount of foreign earned income and foreign housing expenses. But, depending on the foreign country’s income tax rate, you may be better off forgoing these exclusions and applying foreign tax credits to your total income.

What are the gift and estate tax implications?

As with income taxes, U.S. citizens and permanent residents are subject to gift and estate taxes on their worldwide assets. That means that a home or other assets you acquire in a foreign country may be subject to U.S. gift and estate taxes. Again, this can lead to double taxation, depending on the foreign jurisdiction’s tax laws and any applicable tax treaties.

Should you expatriate?

One potential strategy for reducing U.S. taxes is to renounce your U.S. citizenship or permanent resident status. The advantage of doing so is that, rather than being taxed on your worldwide income and assets, you’ll be subject to U.S. income, gift and estate taxes on only your U.S.-source income and U.S.-situs assets. But renouncing citizenship raises some significant tax issues of its own that you’ll need to consider.

To prevent people from escaping taxes on appreciated assets, the U.S. imposes an “exit tax” on “covered expatriates.” A covered expatriate is a U.S. citizen — or a permanent resident who’s held that status for at least eight of the previous 15 years — who:

  1. Has a net worth of $2 million or more,
  2. Has an average annual net income tax liability for the preceding five years that exceeds $165,000 (for 2018), or
  3. Fails to certify compliance with all U.S. tax obligations for the preceding five years.

Essentially, covered expatriates are treated as if they’d sold all their worldwide assets at fair market value on the day before they became an expatriate. While there are some exceptions — for instance, there’s an exemption of $713,000 (for 2018) of any unrecognized gains — the tax liability is determined by calculating the value of the estate as though the person had died on that day. One consequence, therefore, is that any retirement accounts are deemed to have been distributed on the day before the person became an expatriate.

With some advance planning, however, it’s possible to reduce or even eliminate the impact of the exit tax. Techniques include 1) selling your principal residence and taking advantage of the $250,000 capital gains exclusion, and 2) gradually converting appreciated property into liquid assets to spread out your taxable gains over several years.

Expatriation can also lead to some costly gift and estate tax traps. As previously noted, expatriates are subject to U.S. gift and estate taxes on only their U.S.-situs assets. But they’re allowed an exemption of only $60,000, compared to the $11.18 million exemption that citizens and permanent residents enjoy in 2018. If you own a significant amount of real estate or other assets in the United States, expatriation could increase, rather than decrease, your gift and estate tax liability.

Plan carefully before relocating

Considering moving to another country? If so, before putting your house on the market, meet with your financial and estate planning advisors. There are many tax-related details to sort out before picking up stakes and making the move.