Taxes When You Retire Overseas

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Paying taxes when you live overseas is complicated—there's no getting around that. However, you can save yourself the headache of last-minute complications by preparing for common tax situations well before April. Here are two tax law situations that often apply to U.S. citizens who choose to retire abroad.

How Moving Abroad Affects Pension Income Taxes

When a retiree is preparing to move overseas, they'll no doubt wonder how the move will affect the taxes they pay on their pension. Luckily, there's a pretty simple answer to this common question: unless you are planning to renounce your citizenship, the U.S. federal taxes you pay won't change, even if you live overseas.

According to the IRS, "If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."

The actual amount of tax you pay each year during retirement is calculated just as it is during working years: your total income is tallied up in your tax return, including any investment income from non-retirement accounts, then applicable deductions are factored in, you get your taxable income, and the appropriate tax rate is applied to each segment.

While the U.S. side of the tax equation is simple, the country you move to may have a whole separate set of tax laws that apply to you. You will need to check on the tax rules for your intended country of retirement. Some countries base their tax rules on residency instead of citizenship, which would affect any U.S. citizens who move abroad for retirement.

How Dual Citizenship, Living Abroad Affects Taxes When Your Spouse Passes

Suppose you and your spouse retire abroad. Your spouse has a 401(k), and you are the beneficiary. If your spouse passes away before you do, does the 401(k) automatically get transferred to your name as part of the inheritance? Is it taxable income in the United States?

If you are the primary beneficiary of your spouse's 401(k), you should be able to either keep it as an inherited IRA or roll it over into your own IRA. In such a situation, you will only pay tax on any amounts you withdraw. A rollover (assuming it is done correctly) is not a taxable event. However, it's crucial to ensure that the 401(k) plan processes this rollover correctly. You should find a tax professional or advisor in your country of retirement who is familiar with both local tax regulations as well as U.S. tax law. If done incorrectly, you could end up paying a significant amount of extra taxes as you acquire the 401(k) assets.

Additional Resources on Taxes When You Live Overseas

If you're thinking about retiring overseas, check out the International Living website. It offers a lot of information for adventurous U.S. citizens who are looking to move abroad.

You should also thoroughly investigate a country's tax laws and any arrangements between that country and the U.S. The IRS page on "Researching Tax Treaties" is a good place to start.

It's also a good idea to visit the IRS page titled "Expatriation Tax" before moving abroad. This page discusses the tax provisions for U.S. citizens who have renounced their citizenship or ended their U.S. resident status for federal tax purposes.

Article Sources

  1. Internal Revenue Service. "U.S. Citizens and Resident Aliens Abroad." Accessed Dec. 11, 2019.

  2. Fidelity Investments. "401(k)s and Estates: What You Need to Know." Accessed Dec. 11, 2019.