Receiving an offer for a job overseas can be both exciting and stressful. While the prospect of living in a different country, traveling and experiencing a new culture may be intriguing, the practical decisions to be made to accommodate the lifestyle of an expatriate may be overwhelming. According to CNBC, over seven million Americans make the choice to move overseas for a job; below are the financial considerations all of them have had to make prior to the move.
The United States is the only country that requires its citizens to pay taxes on worldwide income. Any citizen or resident alien who earns over $9,000 in the U.S. or overseas must file a tax return with the IRS. Furthermore, certain states may also require Americans to file a tax return. In addition, expats have to comply with the tax laws in the country they are working in. However, there are treaties in place with many foreign countries, as well as the US Foreign Earned Income Exclusion (FEIE), which can offset double taxation by lowering or possibly eliminating taxes from overseas income. If a U.S. employer is sending you to work abroad, the organization can financially help to pay taxes through a tax equalization program. Consult your employer’s HR department to see what assistance may be provided.
Working outside the U.S. may impact your old investments and affect your ability to make new ones. In light of strict regulations by the U.S. government, some financial firms will not allow Americans to maintain ownership of accounts held at the firm while residing abroad. Review your individual checking and savings, retirement and brokerage accounts, as the rules and regulations for each may vary. The complexities have also led many international financial institutions to deny service to Americans living abroad. This can create significant issues for expats who don’t have access to their U.S. based accounts, and are unable to open new ones in their host country. The international banks that do allow Americans to open accounts might require specific documentation, such as proof of employment and income. Americans with a foreign financial account holding an aggregate balance of $10,000 or more annually will need to submit a Foreign Bank Account Report (FBAR) to the IRS.
Parents who have a 529 college savings plan may be taxed on investment gains while residing in a host country. Check with your financial advisor about the possibility of transferring the account to a U.S.-based family member, if permitted by the plan, to avoid paying overseas taxes on the account while living abroad. Moving overseas can also affect state resident status that universities require to be eligible for lower in-state tuition. While most allow families that keep a residence in the state and pay state taxes to maintain the status, the qualifications can vary by institution.
For those that own real estate on American soil, a decision must be made whether to sell or convert it into rental property. The decision will ultimately depend on a number of factors, such as the current housing market, estimated time living overseas, current equity needed, and whether the expat is open to being a cross-border landlord. Often, for simplicity, Americans choose to sell if they are able to get a return on their investment. The decision to rent the home should also involve a cash flow analysis to ensure the move will be profitable after factoring in market rents, expenses, maintenance, and so on. Managing a property while overseas can be challenging and time-consuming, so if you decide that it’s more advantageous to rent the property out, consider hiring a management company. Should you choose to sell the property after conversion, you will likely lose favorable tax treatment that would have applied when it was your primary residence.
As to whether you should purchase or rent a house in your host country, additional considerations should be made. If you are new to the country you have moved to, consider renting temporary housing while deciding what area will be most advantageous for you to live in, considering your commute to work and financial restrictions. If you choose to purchase property, keep in mind that many countries have very different real estate transactions that those you might be used to. In addition, the funds transferred over for a down payment may be subject to foreign-exchange rate fluctuations and other associated fees, which can add up to thousands of dollars. Although expats who purchase property abroad may be able to deduct mortgage points and interest from the income reported to the IRS, any capital gain from the eventual sale of the property may be taxed by both the U.S. and the host country.
While it may be overwhelming to plan for the move abroad, special attention needs to be paid to financial matters. Consider tax, real estate and investment implications that may play a big role in your financial future in your host country. Working with a financial advisor and tax professional familiar with the complexities of working overseas will help ensure a smooth transition.
Financial Planning Association of Massachusetts member Kristin McFarland is the Director of Strategic Partnerships with The Darrow Company in Boston. The Darrow Company is a fee-only asset management and financial advisory firm focused on building and preserving the wealth for their diverse client base.
Kristin McFarland is an investment adviser representative of The Darrow Company, Inc., an SEC registered investment adviser located in Massachusetts. The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.
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