Ownership of Foreign Mutual Funds (PFICs) – As discussed above, owning a foreign mutual fund (PFIC) is a common and costly mistake made by American expats. Using U.S. domiciled funds through an expat-friendly U.S. brokerage company is the preferred way for American expats to save and build wealth.
Foreign Pension Plans – Many American expats contribute to foreign pension plans. Certain countries have bilateral tax treaties with the United States that simplify the U.S. tax reporting and allow the taxpayer to deduct contributions and defer taxes. However, most countries do not recognize pension plans in a tax treaty and special attention will be needed for U.S. tax reporting.
U.S. Retirement Account Contributions – American expat contributions to an IRA, Roth IRA, or 401k account may not always be beneficial. If a taxpayer lives in a country with higher tax rates than the United States, they may not be able to claim a deduction on their local tax return and contributing to an IRA will cause double taxation. However, in a low-tax or no-tax country, an IRA contribution will often make sense and reduce the overall taxes owed. American expats should determine if an IRA or Roth IRA contribution is tax efficient while living abroad.
Foreign Currency – Understanding currency issues is essential for expats who may be earning a salary in a foreign currency but planning for retirement back in the United States. It is important to match future life expenses (retirement, college, home purchase, etc.…) with current assets denominated in the right currency. American expats who are planning a retirement abroad should save considerably on investments tied to their local country of residence.
International Estate Planning – U.S. citizens will also always remain subject to the U.S. estate tax. Given increased U.S. estate tax exemptions, this is less of a concern for many Americans domiciled in the United States. However, countries around the world have vastly different systems of taxing estates/inheritances and distributing wealth at death. Understanding the domicile and residency requirements of a local jurisdiction is essential for long-term American expats. It is always recommended to revisit your estate plan when moving across borders to avoid any unintended consequences. Please review our article on U.S. expat estate planning.
U.S. Tax Obligations – Even if an American expat does not owe taxes, they are still required to file an annual U.S. tax return. It is recommended to use an accountant who specializes in American expat taxes. An accountant who does not normally work with Americans living abroad may miss certain deductions and tax credits that can cause an overpayment of U.S. taxes.
Local Country Tax Obligations – In addition to staying current on U.S. taxes with the IRS, American expats must also pay attention to their home country tax obligations. Every country has unique tax rules, deadlines, and obligations. It is vital that expats understand how their investments will be taxed by their country of residence.
Foreign Spouses and Gifting to Non-Americans – American expats often marry a non-U.S. citizen spouse who may not be subject to U.S. tax. Careful attention must be paid to titling of financial accounts, structuring investments between spouses, and estate planning. In certain instances, shifting assets into the name of a non-resident alien spouse may provide some U.S. tax advantages. However, careful attention must be made to the amount of gifts as the unlimited marital deduction does not apply to non-resident alien (NRA) spouses.