Can you eliminate your U.S. tax burden by retiring overseas?
No, you can't. It's not that simple, and you shouldn't believe anyone who tells you otherwise.
If you're simply and truly "retiring" overseas and intend to live on Social Security or other retirement income alone, your move to a new country (any new country) should be a tax-neutral event. You won't be able to walk away from any U.S. tax obligations; on the other hand, neither will you acquire any new or additional U.S. tax obligations.
Many countries you'd consider for retiring overseas don't tax Social Security or pension income, so, again, if this is the extent of your retirement nest egg, you've got no tax issue to consider and no retirement tax planning is called for.
If, however, you'll be bringing anything beyond Social Security or pension income with you when you relocate overseas, then you need to address the question of taxation. In fact, you need to address it on two fronts -- both back home and in your new jurisdiction of residence.
Note that I'm assuming full-time residence; if you're planning to retire overseas only part-time (fewer than six months a year in another country), then, again, you're off the hook, because, again, no tax planning is necessary.
If, though, you intend to relocate full-time, and you'll be bringing more than Social Security or pension income with you, then new tax issues can develop, depending on where your money will be coming from--that is, whether it's earned income or investment income.
Earned income is just that--money you earn. Wages you receive for services you perform. The good news about earned income for the American abroad is that the first $100,800 (for 2015; the amount is adjusted upwards annually) can be tax-free if you qualify for what's called the Foreign Earned Income Exclusion (FEIE). This is the amount that the U.S. IRS allows you to earn overseas before incurring any U.S. tax liability.
Note that the FEIE applies to earned income only. It's no help when it comes to investment, dividend, interest, or capital gain income.
Bottom line, and in layman's terms, here is what you should be aware of as you address your retire-overseas tax-planning agenda. These are six things I wish someone had told me about international tax planning before I made my first international move:
- Maybe you don't need to do anything. As I've mentioned, a move overseas is often a tax-neutral event for someone with only retirement (that is, pension or Social Security) income.