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.
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.
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:
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.
If so, you may be required to comply with the following tax regulations, among other IRS requirements:
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.
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.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here:
Helpful Q and A libraries