Around nine million Americans live abroad, and thousands more join them every year. The most common reason why Americans move abroad is for a work placement, though others move abroad due to a sense of adventure or for romantic reasons.
Moving abroad can have a significant impact on Americans’ finances though, in particular on their banking, investments, and retirement plans. This can be due to American – and foreign – rules designed to limit or regulate international financial activity, with the ultimate intention of deterring offshore tax evasion. In this article we look at five of the most common financial issues that affect US citizens planning to move abroad.
1. Your US brokerage firm or bank may no longer want to deal with you
Many US banks and brokerage firms are reluctant to retain clients who don’t have a US residential address.
One reason for this is that some foreign countries (including all EU countries) regulate the way financial services are presented and sold to residents in those countries. US banks are aware of this, and don’t want to be seen to be breaking local laws in other countries, with the ensuing risks of law suits it might entail.
Before moving abroad, it’s always worth calling calling up your financial firms and asking “What if I moved to _________”?
As well as bank and brokerage accounts, it’s also worth checking that your US residential mortgages won’t be affected by a move abroad.
2. As a US citizen, it may be difficult to find a bank or brokerage firm in your new country of residence
The 2010 Foreign Account Tax Compliance Act, often referred to as FATCA, enabled the US government to require foreign banks (and investment firms) to report their American account holders’ details to the IRS.
While the majority of foreign financial firms are now complying (the alternative is a tax when trading in US markets), others instead chose not to take on American clients to avoid the reporting burden.
So the unintended consequence of the FATCA law, which was created to prevent offshore tax evasion, has been that many US citizens living abroad have struggled to access banking and other financial services in foreign countries.
This can of course leave many US expats stuck between a rock and a hard place if their US firms won’t accept a non-US address and foreign banks won’t accept Americans.
There are potential solutions though, such as opening accounts with US firms with foreign branches while still in the US, or maintaining a US correspondence address (though this latter option can also have implications in terms of state income taxes and other liabilities).
3. Finding the best way to convert and transfer money across borders
Most Americans living abroad have to transfer money to and from the US (or between other countries), either regularly or from time to time.
Most US banks charge high rates for this service, as do most major foreign banks; or sometimes they will say that they do not charge a fee but then give a poor exchange rate and make their money by converting internally at a much better rate – clients can lose up to 7% of their funds in this stealthy manner.
Thankfully, there are some new companies such as Transferwise, OFX, and Xoom that allow money to be converted and sent to foreign accounts (and to US accounts) at a relatively low cost by acting as intermediary.
4. Find an expert expat tax advisor
The US taxes based on citizenship, which means that American citizens who live abroad have to keep filing US federal taxes, and they may also have to file foreign taxes and US state taxes (depending on the rules in their former state).
To avoid paying taxes to two countries, most US expats file additional IRS forms to claim tax credits or exclusions, depending of their situation. Although the US has tax treaties with over 60 other countries, these treaties in themselves don’t allow Americans who live abroad to avoid filing US tax forms. They are still relevant though, as they often define how US investments are taxed in the other country, which may be at a preferable rate.
It’s important therefore to consult a specialist expat tax services provider rather than rely on a CPA in the States who won’t know the ins and outs of US tax filing for expats in sufficient detail. A familiarity with cross border reporting, filing, tax treaties, and the interaction of different tax systems is essential. For Americans living abroad it is ideal to find a tax advisor who does both local taxes and US taxes, since they are most likely to understand the tax treaty between the two countries.
5. Understand the tax implications for retirement accounts
Many Americans who move abroad have US retirement plans such as Roth IRAs where the income taken in retirement isn’t taxable. This benefit doesn’t extend to other countries’ tax systems however unless explicitly stated in a tax treaty, so retirement income may be taxable in their country of residence.
Contributions made to traditional IRAs and 401k plans from abroad may also be considered taxable in another country. Similarly, foreign retirement plans with tax benefits in another country, whether at the point of contribution or distribution, may be subject to US tax unless exempt under a tax treaty.
Americans living abroad should in particular be cautious about investing in non-US mutual funds, which may look attractive but are often subject to complex US tax reporting requirements as they’re considered by the IRS to be PFICs (Passive Foreign Investment Companies).
All cross border finance has potential pitfalls, and we strongly recommend that US citizens planning to move abroad seek advice from specialist expat financial and tax advisors.
Sincerely,
Tom Zachystal, CFA, CFP©
President
Individual Asset Management (IAM) Contact Us