Retirement abroad rightly has a wide appeal, often because the quality of life can be higher, with many places offering a lower cost of living, a warmer climate, and high-quality, affordable healthcare .
Mexico, the Caribbean, South America, and parts of Europe and Asia all remain popular retirement destinations for the above reasons, however as a US citizen or green card holder living abroad, you are still liable to file US taxes, and in some cases, depending on your individual circumstance, you may be liable to pay US taxes too.
The US is the only developed nation that taxes based on citizenship rather than on residence, so that as an American, wherever in the world you live you still fall under Uncle Sam’s tax regime.
This means you still need to file form 1040 each year to report your worldwide income if it’s over $10,000 (or just $400 of self-employment income). Note though that the filing date for expats is June 15th rather than April 15th, with a further extension available until October 15th on request.
Furthermore, if you have a total of at least $10,000 either in one or spread across several foreign bank or investment accounts at any time during a tax year, you must file an FBAR (or Foreign Bank Account Report) to report them. You may also have to report your foreign assets if their value is over $250,000 per person, not including a home owned in your own name that is your principal residence.
Avoiding Double Taxation
As well as filing your US taxes, it’s likely that you’ll also be liable to pay income taxes in the country where you’re living.
Thankfully, the US has some electable exemptions that take most expats out of US tax liability entirely.
“While a foreign pension plan usually provides favorable tax treatment within its national jurisdiction, the general rule is that it is not a qualified retirement plan (“QRP”) under the Internal Revenue Code for US income tax purposes.” - Forbes
If you pay foreign income taxes meanwhile, the Foreign Tax Credit allows you to claim a $1 US tax credit for every dollar of tax that you’ve paid in a foreign country.
These two exemptions can be combined if necessary and if appropriate for your situation.
Payments from qualified US pension plans such as IRAs and 401 (k) plans are exempt from US taxes. US social security payments may be taxable however, depending on levels of any other income. If you choose to have US social security payments or pensions paid to you directly abroad rather than into a US bank account, you may be liable to pay foreign income taxes on them, so it's worth considering the tax rules of potential destination countries as part of planning for retirement abroad.
Foreign pensions meanwhile are typically not taxable in the country where they are sourced, however they normally are considered taxable income in the US tax system. It may be worth claiming the Foreign Earned Income Exclusion or the Foreign Tax Credit to exempt them from US taxes.
Once you live abroad, most States stop charging you State taxes, so long as you can prove that you are resident elsewhere, however some, including New Mexico, Virginia, South Carolina and California, may require that you continue paying if you have any form of base there. One possible strategy is to establish residence in a State that doesn’t tax expats before you move abroad.
Whether to purchase or rent your home abroad is a question all Americans retiring abroad need to consider. While many choose to buy, they should bear in mind is that if or when they sell the property, any profit they make on it will be considered taxable income by the IRS. Something else to factor in is that there is a US tax exemption called the Foreign Housing Exclusion that lets expats deduct housing costs from their US taxable income if they are renting a property abroad from US taxes.
In conclusion, while taxes for Americans living abroad can be complex, with a little planning most US expats won’t end up owing Uncle Sam any taxes, despite still having to file if their income is over US $10,000. The key is very much the planning though, and we strongly recommend that if you are thinking about retiring abroad, or if you already have, you should consult with a US expat tax specialist to ensure that you minimize your US tax liability.