When I talk to International Living readers, I usually focus on sharing how you can minimize your U.S. taxes and stay out of trouble with the IRS. But today, I’m going to do something a little different. I'm going to share with you what I do.
I live part of the year in Jaco, Costa Rica. When I bought my condo, I kept the owning and renting of this foreign real estate simple: I bought it in my own name. That’s pretty unusual; Jaco is one of the few remaining areas that allow Americans to own beachfront property in their own name. This keeps my U.S. tax reporting of the rental income reportable—just like a U.S. property—and I do not have to make a foreign corporation disclosure.
But I do have disclosure reporting. You see, I am in the process of gaining residence in Costa Rica. As a result, I had to establish a bank account here of an amount that is reportable on both the FBAR (FinCEN Form 114) and the Statement of Specified Foreign Financial Assets (IRS Form 8938).
I know, we all hate IRS disclosure reporting requirements, but it truly is easier (and less expensive) to stay out of trouble with the IRS than to get out of trouble later. My financial disclosures are just a reporting headache and don’t cause me to pay more in U.S. taxes than I would otherwise. And of course, I want to avoid any of the expensive IRS penalties for not filing.
As I expand my stay in Costa Rica to six months of the year, I have to continue working in the business—I’m not retired just yet. When I can manage a work schedule of 330 days abroad in a 12-month period, I’ll qualify to take advantage of the great tax benefits associated with the Foreign Earned Income Exclusion (FEIE) and Foreign Housing Allowance. Those are income tax savings I am really looking forward to.
In the meantime, I’ve been preparing myself for a move out of the U.S. using “the move before you move” principle—establishing domicile in a no-income tax or low-income tax state (remember, no matter where in the world you live, you still have to pay taxes to Uncle Sam).
I’ve established my state domicile in Mississippi. I always advocate moving to one of the no income tax states like Texas, Nevada, or Florida. But Mississippi was where my children were and it's a low income tax state. However, my daughter has recently moved to Dallas, and so I think another move—to a no income tax state—will be on the cards. And then I won’t have to worry about state income tax at all.
I’m taking my time to make the transition to living and working full time overseas, but maybe you are looking to make a move sooner. So I highly recommend considering a move to a no-income tax state before you move abroad. This is something I explore in much more detail in my easy-to-understand guide to expat taxes.
It’s called Expat Taxes Made Easy: The Complete Guide to U.S. and Foreign Taxes for the American Overseas and in it, you’ll learn more about the best ways to structure your tax affairs so that you don’t end up paying more in taxes than you should, as well as the benefits you can take advantage of when you move overseas.
I’ve been a tax professional for 30 years…and I want to ensure you have the best quality and most up-to-date information at your fingertips for when you make your move overseas, just like I have as I plan my move to Costa Rica.
Editor's Note: Learn more about how you can manage your taxes in your new life overseas with this in-depth guide. Pick up your copy of Expat Taxes Made Easy today.