Your dreams of living abroad are taking shape. You’ve traveled enough to know that you are comfortable with other cultures and exotic locations. You even have a few places that you know you want to return to. You are talking with expats and reading everything you can get your eyes on. You want to make sure that your dream turns out just how you envision it.
Do your plans to move include tax and legal planning? How about financial organization and tying up Stateside loose ends? No?
Well, they should.
Getting your taxes in order isn’t the most glamorous part of moving overseas…but if you do it right, you can save yourself up to thousands of dollars a year…and avoid some common and costly mistakes are made when your planning skips over these issues. Those mistakes are easily avoided, but require some planning and guidance.
So to put you on the right track, here are my top tips for planning your taxes ahead of a move overseas.
1. Don’t forget to file your U.S. tax return.
This might sound like an obvious piece of advice…but not filing a U.S. tax return while you are abroad is the top mistake U.S. expats make. Annual filing of your U.S. tax return will help you avoid an IRS audit four years down the road and make sure that you qualify for some of the valuable tax benefits for expats.
When you file, be sure that you’re giving the IRS the full story with correct disclosure reporting. Again, though this sounds obvious, it’s an issue we’ve seen again. Many expats, while living abroad, have been tempted to not properly disclose their foreign financial assets, accounts, and businesses. But doing so could be a very expensive mistake.
Disclosure reporting rarely generates additional tax but can result in huge penalties if not filed. These are $10,000 statutory penalties to each and every unfiled (or incorrect) reporting form.
In recent years, the IRS has substantially increased its ability to find your foreign financial assets, accounts, and businesses by requiring foreign financial institutions to report on your accounts and holdings.
Even though the IRS is looking for the “big fish” out there who are seeking to hide assets offshore, they are happy to catch the little fish too. Know your reporting requirements and remember: It is easier (and less costly) to stay out of trouble with the IRS than it is to get out of trouble with the IRS.
2. Remember your state tax responsibilities.
Did you know that for income tax purposes, the state from which you leave may consider you a resident, just temporarily away? If you currently file a state income tax return, you may have state tax responsibilities while living abroad that might surprise you.
However, if you change your state domicile to a no-income tax state before you move abroad, you can eliminate this responsibility and tax altogether.
By moving to a no-income-tax state (there are seven), you can effectively eliminate your state income tax issues and requirements. (You’ll find a full list of the seven no-income-tax states as well as information on how to change your state domicile to one in my book, Expat Taxes Made Easy.)
3. Don’t rush to make plans…and get the right advice.
When you decide to make the move, take the time to make sure you are making the financial decisions that are right for you.
We see people making fear-based decisions—usually made with a limited amount of information—ahead of making a move overseas. Decisions as simple as cashing in an IRA can unnecessarily generate thousands of dollars in income tax.
Setting your fear aside and knowing all your options will give you the foundation you need to make smart decisions about your future abroad.
To help you make the right decisions for you, remember to enlist the help of informed and experienced professionals who will be looking out for your best interests.
Stateside, you need to have professionals you trust to help you plan and manage the U.S. implications of your decisions abroad.
And because foreign legal, tax, and property regulations and cultures can be much, much different than in the U.S., you need to make sure that you receive good advice regarding your foreign decisions. These professionals can help guide your decisions and protect your interests. More often than not, they will save you more in money and headaches than they cost.
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