An American Retiree Moving Overseas Likely Won’t Reduce His Tax Burden

A friend told me this week that his parents are looking to move overseas for their retirement to save taxes. He recognizes but hasn’t been able to help them understand that that isn’t a realistic objective given their circumstances.

My friend’s parents are retired government workers receiving government pensions. Pension income is not eligible for the Foreign Earned Income Exclusion (FEIE), meaning that moving overseas won’t change this couple’s U.S. federal tax situation in any way.

The pair could eliminate their state income tax obligation by moving overseas, but they could also eliminate their state income tax burden by relocating to one of the 10 U.S. states that doesn’t tax Social Security or pension income.

My point is that you shouldn’t make a move to another country simply to cut your tax bill…and, often, moving overseas won’t accomplish that anyway. Paying less in tax overall can be a benefit of living in another country, but choosing where to live based on a country’s tax rates is putting the cart before the horse.

A country that taxes only on a jurisdictional basis (that is, that taxes only income earned in that country regardless of your citizenship or residency status) is a no-brainer from a tax-planning point of view. A country with a jurisdictional approach to taxation is a straight-up tax haven. Panama qualifies.

However, beyond this small arena, things are less black and white. France, for example, has a reputation as a high-tax jurisdiction. However, that’s not necessarily the case, thanks to how French income taxes are calculated. To figure the tax owed by a French family of four, for example, you begin by dividing the household income by four. After the proper calculations are then made, it could work out that this French family of four owes less tax than would a comparable U.S. family of four.

The only tax savings an American moving himself or his assets overseas can count on is a break on personal income tax if he qualifies for the FEIE. This is a permanent tax savings on your earned income (as long as you continue to qualify).

The bigger tax-related opportunity for the American (or anyone) would be to set up and operate a business overseas. This way, you can pay yourself a salary (that can qualify for the FEIE), then retain all other earnings in the company, deferring any associated tax bill. That is, you wouldn’t owe the IRS tax on this income (corporate earnings) until you eventually pay them out as dividends.

Lief Simon

“Lief, it’s possible I may have to file bankruptcy. Will European or Latin American countries know that about this? Is it possible that they would not let me become a resident? Could it affect my ability to purchase a small property overseas or to rent a place?

“I will have an annuity that starts next year so will have a small income and would like to retire abroad.”

J.F.

Bankruptcy won’t show up on any documentation you’d need to provide for residency in another country. And it won’t affect your ability to buy a piece of real estate or to rent overseas.

Bankruptcy could affect your ability to qualify for a loan to buy a piece of property. In some cases where local bank financing is available, banks ask for a copy of your U.S. credit report. This is the case in Panama, for example.