Why Lief Simon Is Incommunicado Today
“You’ll notice that Lief is in his office as usual,” I wrote this morning to our Panama City staff. “However,” I continued, “he asks that you pretend that he’s not. That is, except in case of critical emergency or dire need, please steer clear of Lief’s desk today.”
Tomorrow is Tax Day for us and all other Americans who asked Uncle Sam for a six-month extension for filing our U.S. taxes. For the past two weeks leading up to T-Day, our family room has been strewn with piles and stacks of bank documents, expense receipts, and account statements that I’ve been strongly encouraged not to touch. Jack and I tip-toe through the room, careful not to sit a glass or a book in a place that might interfere with Lief’s filing “system.”
As we’re American citizens living abroad (that is, Americans legally resident elsewhere), our taxes needn’t be postmarked by April 15 each year. We have an additional 60 days (until June 15) to get our returns to Uncle Sam. Nevertheless, Lief applied for a six-month extension for our U.S. tax filing this year. Meaning that, for these past two weeks, our pillow talk has had a lot more to do with foreign-earned-income analysis, foreign tax credits, investment rental write-offs, and mortgage expense than…well, than with anything else.
Lief is holed up in his office today with our Panama accountant finalizing our returns. From behind his Do Not Disturb sign he offers the following tips for other Americans abroad keen to keep compliant but eager, as well, to pay no more in U.S. tax each year than absolutely necessary.
This is our list of six things we wish someone had told us about international tax planning and asset protection before we set off on our living and investing overseas adventures some 16 years ago:
First, maybe you don’t need to do anything. Asset protection isn’t an issue until you’ve got assets enough to warrant the investment of time and money to figure out how to protect them, and many retirees overseas don’t need to invest in tax planning either. A move overseas is often a tax-neutral event for someone with only retirement (that is, pension or Social Security) income.
Second, whatever you do, it shouldn’t cost you tens of thousands of dollars. OK, maybe if you’re Bill Gates or Warren Buffet, a big investment in managing your tax and asset issues is warranted. For you and me, it’s not.
Third, the Foreign Earned Income Exclusion (FEIE) may be the beginning and the end of the tax planning you require. (This is discussed in detail here.) As an American citizen living and working abroad who qualifies for the FEIE, your first US$97,600 (for 2013) of earned income is tax-free in the States.
Note, though, that the FEIE applies to earned income only. It’s no help when it comes to investment, dividend, interest, or capital gain income.
Fourth, when it comes to purchasing and holding real estate overseas, remember two things: First, the jurisdiction is the key; second, as a result, no attorney in your home country is going to be able to help you figure out what to do. You need a local attorney experienced at working with foreign buyers to help you determine how to purchase and how to hold (in a local corporation, in a foreign corporation, in your own name, in a trust, etc.).
In some jurisdictions, you’re wise to hold property in a local or an offshore corporation…but not all. Before you do anything, make sure you understand why you’re doing it and the real benefit.
Fifth, when it comes to addressing the tax issues in any new jurisdiction where you’re considering taking up residence, the key is to research, plan, and take action before taking up residence. Certain options for mitigating your local tax bill can be taken off the table once you’ve taken a local address. Get local legal advice as early on in your planning as you can.
Sixth, you can avoid any local tax issues by being only part-time resident overseas. The particulars differ jurisdiction to jurisdiction, but, generally, spend fewer than six months in a place and you can’t be considered full-time resident for tax purposes. This can mean no tax obligation in the country where you’re part-time residing, but it also means that you will need to use the 330 Day Test, and not the Residency Test, to qualify for the FEIE. This means you can spend only up to 35 days per year in the United States (as I said, not an issue if you don’t have earned income).
I’m lucky. I happen to be married to the most international tax-savvy guy I know.
We’ve met a lot of international tax advisors in our careers. Most of them are the reason Lief has become as expert in this area as he is. The “experts” we’ve found typically haven’t been worth the fees they’ve charged. International tax experts tend to over-complicate, to miss simple but important strategies, then to bill by the hour or the page.
Kathleen Peddicord