Helping a Client Who Plans to Retire Abroad Consider Their Tax Situation

Do you have clients who want to spend their golden years in exotic locales? For your post-accountancy life, are those dreams of tropical beaches and lower living costs your own?

Increasing numbers of Americans are deciding to spend some of their golden years outside of the United States. More than 413,000 people, a 40% increase from 2007 to 2017, received their Social Security benefits at a foreign address, according to CBS News’s data.

Many retirees prefer to live abroad rather than in the United States because it is less expensive. Three decades ago, International Living magazine began compiling its list of most affordable retirement destinations. Cambodia, Vietnam, Bolivia, Peru, and Ecuador all made this year’s list of the best all-around value when it came to cost of living, all of which offer retirements that can fit a $1,000 to $2,000 monthly budget.

Although retiring abroad may be a dream come true for the adventurous, it is not without tax and financial planning issues that need to be addressed. How can CPAs assist their clients in navigating the complexities of retiring abroad?

Preparation is key when it comes to tax obligations

According to Dan Prescher, a senior editor with International Living who has spent the last two decades with primary residences in Latin America, many retirees think they’re done dealing with the IRS.

However, this is not the case, and you should inform your clients that they will be required to pay taxes in the United States on any income they receive from investments or new ventures.

According to Prescher, all U.S. citizens are required to report their worldwide income, regardless of where they earn it.

When retiring to another country, many Americans don’t consider the tax implications of starting a side business or receiving dividends from investments made in their new country of residence, according to CPA Katelynn Minott, a senior partner at a tax consulting firm Bright! Tax. If a client is thinking about making such a move, the CPA should let them know about the potential tax consequences.

As with US citizens working abroad, retirees often make the mistake of assuming they will receive a tax break while living abroad. As a result, they may be unaware of the Sec. 911 foreign earned income exclusion, which only applies to income earned from services performed during the year, not pension or retirement account funds.

She said, “There are definitely tax breaks.” There are exceptions for retirement income, however.

Consider what it would be like to live in a foreign country

According to Prescher, CPAs should discuss with clients the importance of saving money to cover the costs of relocating to a new country. He also recommends that retirees who are contemplating a move abroad go during the off-season and stay for an extended period of time to get a sense of what life is like there on a daily basis. To find out if a beach town becomes a ghost town after the seasonal vacation crowds leave, they should investigate the health care and banking systems.

In many ex-pat communities, information is freely shared, and Prescher recommends using online communities to find answers.

On the other side, locate a tax and financial planning professional

According to Minott, people who are relocating to another country often neglect to consider the expectations of their new host country because they are preoccupied with how they will balance the tax equation on the American side.

The tax burden in their new country of residence is “not necessarily taken into consideration,” she added.

When her clients move to new countries, Minott frequently refers them to tax experts. Professional organisations and personal networks can be used by CPAs to find services and resources that help their clients understand their tax obligations when working abroad.

International investments can be risky

According to CPA John Ramdeen of Greenback Expat Tax Services, many ex-pats work with an investment adviser in their new country, but those professionals may not be aware of U.S. tax rules.

Many of these investment advisers are unfamiliar with the reporting requirements in the United States, and Ramdeen has had clients who learned about a different set of rules for foreign investment vehicles after the fact. The additional reporting, which can significantly increase tax preparation costs and carry high U.S. income tax rates, is triggered when Americans living abroad might have what is considered passive foreign investment company (PFIC) incomes. As Ramdeen pointed out, non-US mutual funds, exchange-traded funds, and unit investment trust all fall into this category.

Additional compliance reports are generated and can lead to a significant increase in taxes, Ramdeen said.

As a result, he recommends that U.S.-based CPAs discuss this possibility with any clients who are contemplating an overseas retirement. Investment strategies that take into account tax implications can also be recommended by CPA financial advisors.

Be on the lookout for disclosures involving foreign banks

Most ex-pats prefer to have a bank in their new country. However, the IRS wants to know about their foreign financial accounts as part of the FBAR reporting requirements, and that has reverberations in the United States.

If you have clients who are moving out of the country, make sure they are aware of these requirements so that they aren’t caught off guard by them, Minott advises.

Recognize your blind spots

In addition, CPAs should be honest with their clients if they aren’t familiar with complex tax filings for Americans living abroad, Ramdeen advised.

Expatriate CPAs are likely to be well versed in the intricacies of international taxation, but the average CPA may not be.

To understand that “I might be out of my element here,” Ramdeen said.

For these situations, a CPA with that kind of background might be able to help, Ramdeen advised.

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