Five Key Financial Considerations to Moving Abroad
Spoiler alert: There’s no escaping the IRS
Maybe it’s a heavy case of coronavirus cabin fever, but interest in moving abroad has been increasing lately. The International Living website reported that site searches for “How to Move Out of the U.S” increased 1,600% (yes, 16-fold) between May and October.
While retiring abroad has always been a thing for some adventurous sorts, the coronavirus crisis is likely to make it more doable for people still working. Corporate America has been forced to learn at warp speed that remote work, well, works. At least for many people in many jobs. If businesses are doing just fine with a Zoom-connected, work from home staff, it stands to reason that working from a home in another country can be doable.
LinkedIn reports that remote job postings on the site from U.S. employers more than tripled since the start of the coronavirus crisis. Granted, not all employers will be hip to remote work across borders. And most important, not every country is going to roll out the red carpet for your long-term stay as a digital nomad. Researching the residency rules for a given country, if you want to work, is imperative.
Whether you are retired or angling to work abroad, here’s a short cheat sheet of financial issues to be aware of.
--You’ll still owe U.S. taxes. When you live abroad you are still a U.S. citizen. And we’re the only country that taxes citizens no matter where they live. The good news is that, if you are in fact spending the majority of the year outside the U.S., you should be able to qualify for the foreign earned income exclusion. This year the first $107,600 you earn outside the U.S. is excluded from your federal tax. If you still maintain a residence in a state, you may be liable for state taxes as well.
If you are self-employed, you are still on the hook for self-employment (Social Security and Medicare) taxes. Those aren’t part of the foreign earned income exclusion.
--As a foreign resident, you will likely owe taxes there, too. Plenty of countries have agreements with the U.S., where you will get a credit for all tax dollars paid to the U.S. The bottom line is that you typically aren’t going to face double taxation. But at a minimum, you likely are going to want to hire a local tax pro, at least for the first year, to make sure you understand the terrain. Even if you don’t owe money, you must file.
For retirees living off of unearned income (Social Security, pensions, saving, etc.) the tax rules are often different than if you were still earning income. Again, consulting a local tax pro is wise.
--Your U.S. based health insurance (including Medicare) won’t work. For at least the first few months you’ll need a global health insurance policy. (A web search on that, or the term “international health insurance,” will get you rolling on that learning curve.)
Once you establish residency you will likely be eligible (and possibly, required) to obtain health insurance locally. In many countries there are two systems: public and private. Public can be high quality care, but you may not be up for the wait times and the bureaucracy.
And if you are moving somewhere where the public system is already stretched thin, it’s worth considering if you should add to the system’s burden, or if sticking with the private system (it will still likely be more affordable than what you’re used to in the U.S.) is a more conscientious way to be an expat.
--It’s easiest to leave your financial accounts stateside. You’ll likely want to open a local bank account to pay bills etc. (News flash: In Europe, debit cards are a whole lot more popular than credit cards, making a bank account a necessity.)
It’s possible to have Social Security benefits directly deposited in your foreign bank account. But you can also keep all your direct deposits (not just Social Security) and U.S. financial accounts as is, and then transfer money to your local bank when you need it.
Wiring directly from a brick-and-mortar U.S. bank can be costly. Many charge an international wire fee and give you a lousy exchange rate. The better method is to link your U.S. bank account to a third-party app that offers a competitive exchange rate. Transferwise is a global money transfer service that is popular with expats.
Be aware, when you open a bank account in your new home country, you will need to file an annual FBAR form with the U.S. IRS if, at any time of the year, your foreign account (or the combined balances of multiple accounts) ever tips over $10,000. You won’t owe any extra tax, but it’s a required filing.
--You are at the whim of the dollar’s value. No doubt, you have some exchange rate experiences from vacations. But it is a bigger issue when you are relying on U.S. dollars to live off of. That can go either way.
For example, if you are thinking Buenos Aires, 2020 has been a boon for U.S. expats, as the dollar has gained 30% in value against the Argentinian peso through late October. Thinking about somewhere in Europe? The dollar has lost more than 10% of its value against the Euro since the coronavirus crisis took hold.
You want to set your budget to be able to absorb the times when the currency swing isn’t in your favor. And having a local bank account makes it possible to consider bigger transfers when the exchange rate has moved in your favor.