According to the U.S. Department of State, roughly 8.7 million Americans have chosen to retire abroad. International Living, which has covered the topic for decades, reports that some of the most popular overseas retirement destinations for 2019 include Mexico, Ecuador, Spain, and Panama. But while balmy climates and faraway beaches might seem tantalizing, U.S. retirees should think carefully about tax planning strategies before relocating abroad, as there are strict income tax foreign account and foreign income generating asset disclosure & reporting requirements for taxpayers overseas – requirements from which seniors are not exempt. While there can be harsh penalties for noncompliance with these requirements, relief may be available via participation in the IRS’ offshore streamlined voluntary disclosure procedures or Offshore Voluntary Disclosure Program (where criminal tax or information reporting is a concern), as our international tax attorneys discuss in this article.
Do Retirees Have to File and Pay Taxes Overseas?
In short: Possibly. The answer depends on factors such as your age, your income level, and whether you own or control any offshore financial, retirement or investment accounts, such as foreign bank accounts or brokerage accounts, whether you have offshore businesses or rental property, whether you have offshore W2 like employment (Foreign Earned Income Exclusion) and if you are paying taxes offshore (Foreign Tax Credit) & the effects of any applicable income tax treaty. While only an experienced international tax attorney or CPA can provide you with the personalized tax guidance you need, the questions below can help you determine whether you might have foreign information or U.S. income tax filing obligations on offshore income.
How Old Are You, and What is Your Income?
According to the Social Security Administration (SSA), the full retirement age, which varies from year to year, is 65 for people who were born in 1938 or later. Depending on whether you are under 65, or are age 65 or older, the following filing thresholds apply:
- Single
- 65 or older – $13,600
- Under 65 – $12,000
- Married, filing separately
- 65 or older – $5
- Under 65 – $5
- Married, filing jointly
- Both spouses age 65 or older – $26,600
- One spouse under age 65 – $25,300
- Both spouses under age 65 – $24,000
- Qualifying widow or widower
- 65 or older – $25,300
- Under 65 – $24,000
- Head of household
- 65 or older – $19,600
- Under 65 – $18,000
If your income is below the applicable threshold, you do not need to file an income tax return, or Form 1040. If your income meets or exceeds the threshold, you are required to file. However, you may be eligible for the Foreign Earned Income Exclusion (FEIE), which, as its name suggests, enables qualified taxpayers to exclude as much as $105,900 of their foreign earned income, often resulting in substantial tax savings. (Note that this figure varies from year to year due to inflation.) For more detailed information about the FEIE, see our guide for California taxpayers living abroad.
Do You Have Foreign Income or an Overseas Bank Account?
If so, you may be required to comply with the following tax regulations, among other IRS requirements:
- You must indicate the income on your tax return. Line 21 asks taxpayers to report “other” income – which includes your offshore income.
- You must complete Schedule B (Form 1040) accurately. Part III of Schedule B (Interest and Ordinary Dividends), which should be attached to Form 1040, asks several questions specific to foreign accounts: for example, whether you must file FinCEN Form 114, and if so, in regard to what country. Schedule B is mandatory for taxpayers who meet various IRS criteria, such as “having over $1,500 of taxable interest or ordinary dividends.”
- You may need to file an FBAR (FinCEN Form 114). The Foreign Bank Account Report requirement applies to certain taxpayers with foreign bank accounts with a cumulative balance above $10,000 at any point during the calendar year. For detailed information about FBAR, see our articles on:
- FBAR reporting
- FBAR penalties
- How a FinCEN Form 114 attorney can help
- You may need to file Form 8938 (Statement of Specified Foreign Financial Assets). Similar to the FBAR, Form 8938 is used to disclose offshore assets and income. However, the reporting threshold is five times higher at $50,000 (or greater, depending on the situation). For more information, see our articles on:
Did You Fail to Report Foreign Accounts? Consider Making an Offshore Streamlined Voluntary Disclosure
If you are out of compliance with the aforementioned reportable income requirements, and foreign information requirements including FATCA and/or FBAR filing requirements, you are in danger of civil penalties and even criminal prosecution, depending on the nature of the violation. However, if you meet the programs expat & other requirements, a streamlined offshore disclosure will not result in any foreign information reporting penalties. The forgiven FBAR penalty alone is $10,000 a year with a six-year statute of limitations which could total to as much as $60,000 in purely civil fines. It may also be possible to avoid penalties for failure to file or pay taxes, including accuracy-related penalties, provided a potential subsequent foreign tax and information return audit does not uncover tax fraud (tax evasion) or willful (intentional) conduct on the part of the taxpayer. If there is criminal tax or criminal information reporting potential in your fact pattern an OVDP is a type of amnesty program that can be utilized to come back into compliance without the risk of facing potential criminal tax or information reporting liability.
Of course, as is true of all IRS procedures, there are specific eligibility requirements for offshore streamlined disclosures, notably a “non-residency” requirement that affects U.S. citizens and residents, in addition to domestic estates. Our foreign account tax compliance attorneys can help you determine whether you satisfy the criteria, and how to most safely proceed toward resolution of your offshore tax issue. There is also a domestic version of the streamlined voluntary disclosure program for U.S. residents that are out of foreign taxable income and information reporting compliance but do not have criminal tax or information reporting exposure. Only an experienced international criminal tax defense attorney can accurately measure the badges of fraud that may or may not be present in your fact pattern and recommend the proper program to address your noncompliance.
International Tax Planning Attorneys for Retirees with Foreign Income and Assets
Tax planning can be a complex task – particularly when variables like foreign income generating assets and Social Security benefits enter the picture. At the Tax Law Office of David W. Klasing, our CPAs and tax lawyers for expats have more than 20 years of experience helping retirees comply with IRS disclosure rules, minimize or avoid tax penalties, and make smart tax and estate planning decisions for their families and businesses.
If you are retired overseas, or are planning to relocate abroad in the near future, contact the Tax Law Office of David W. Klasing online to schedule a reduced-rate consultation. You can also reach us by calling (800) 681-1295. You will also want to make sure you have considered the exit tax in your decision to retire overseas if you are planning on expatriating by turning in your green card or U.S. citizenship.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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