In this podcast/blog/video, I discuss financial tips for expats. You can see our video here.
The State Department estimates that there are about 9 million US citizens living abroad. Mexico, Canada, Germany, Philippines, Israel, and the UK are the top six countries where Americans live abroad. There are a wide range of reasons why Americans spend time away from the US, including: relationships, study, work, retirement, and just seeking an adventure and change.
There are several financial issues to consider to make your experience abroad successful. Here are the seven most important.
2 Underestimating the cost of living
3 Banking and money transfers
4 Investment products and small businesses
5 Health and life insurance
6 Investment accounts
7 Estate Planning
1 Tax filing
There are many aspects to taxes as an expat. I will highlight some of them.
If you are a citizen or permanent resident of the United States, you are obligated to file US taxes with the US Federal Government each year, no matter the country in which you reside. As a US resident, you’re taxed on your worldwide income no matter where it’s earned.
The Foreign Earned Income Exclusion reduces or eliminates double taxation on wage income earned abroad. In 2019, you’re eligible to exclude up to $105,900 in foreign earned income in the 2019 tax year.
You need to file FinCEN form 114, also known as an FBAR (Foreign Bank Account Report), if you have more than US$10,000 in aggregate in foreign bank accounts at any time during the tax year. There is no cost for filing but there are steep penalties if you do not. If you have assets abroad worth over US$200,000, you need to file form 8938 declaring them.
Your tax situation will determine if you can contribute to tax advantaged accounts, such as: IRAs, Roth IRAs, 401ks, and 529 education accounts. Your taxes will determine if you get a benefit from charitable contributions.
Taxes are important if you have your own business registered in your host country. You will need to file in the host country and that income needs to be declared on your US tax return.
Your Social Security benefit is Consider your US social security situation. While working abroad and earning tax exempt, you will not be receiving qualified quarters towards your future social security benefit. Keep that in mind as a consideration.
Here is a list of countries that the US has a bilateral tax treaties: Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine, Union of Soviet Socialist Republics (USSR), United Kingdom, Uzbekistan, Venezuela
You can see our podcast for more details: https://aiofinancial.com/expat-tax-issues/
2 Underestimating the cost of living
Many expats arrive in their host country without having a good idea what the living costs are likely to be. There are many good online resources, including: blogs, facebook groups for local expats and sites like expatistan.com that can give you some idea what to expect. The cost will vary from person to person but you can get a reasonable estimate, if you put in the time.
Even after doing your research, you may find that many expenses are more than you expect. Here are a few that together can stretch a budget: car insurance, health insurance, visas and other registration paperwork, taxes, shipping costs, bringing a pet, utilities. Research will help but there will always be surprises so be prepared to spend a bit extra.
Another problem with living abroad is treating the experience like a long holiday and regularly overspending your budget. There will be many new things to see and experience to have, be careful to consider these expenses. If you are calculating your expenses based on living like a local, be sure that’s what you are doing.
Consider ‘lifestyle creep.’ This is the situation when your expenses increase over time and previous luxuries become standard expenses. This generally happens as income increases but it can outpace income. This is common when you are living for an extended period of time on a reduced budget.
3 Banking and Money Transfers
There may be a need to move money between the US and your host country. It is worth putting in time to evaluate options and determining who has the best exchange rates and lowest fees. We have found that some banks will provide transfers for a low fixed fee to particular banks at a reasonable exchange rate. Sometimes exchanging some amounts of cash is the best option. It is general is best to move large sums, such as monthly amounts, for the fixed amount.
You will most likely want to do have a bank account in your host country.
Evaluate credit and debit cards for exchange rates and fees. We found that some debit cards will reimburse all bank fees (domestic or foreign) making them helpful. In some cases, using US credit cards make more sense than using host country credit cards. You should close and consolidate cards and inform the credit card companies that you will be abroad.
You will want to retain an address in the US while you are gone. You can change your mailing address to that of a relative or there are mailing services that you can use. This will make it easier to keep bank accounts open and not impact your credit rating. This will make it easier to incorporate back into the US, if you return.
4 Investment Products and Small Businesses
In areas with large expat populations there are often financial product salespeople. Some could be good investments, others are very bad and may not be appropriate. These salespeople earn money based on sales, receiving commissions, so they may not have your best interest in mind.
Especially in developing countries there can be a strong temptation to invest in local small businesses to help locals and have a business of your own. I personally have done this several times, with varying amounts of success. I recommend going in very slowly, do your research and know that there are many more risks than starting up a business in the US. Don’t invest more than you are able to walk away from.
Be careful with real estate investments. Real estate may not be very liquid if you want sell. Make sure you’re committed to the area long term. Get professional advice to be sure the title is clean and that you understand the costs of ownership in your host country. If you are new to a country, I recommend being patient and taking this slowly.
5 Health and Life Insurance
That majority of your US insurance will not cover you abroad. Most travel insurance will not cover you if your permanent residence is abroad.
You need to inform your insurer about your change in residence and make sure you have appropriate coverage for your needs. In many cases you will be better off with policies provided in your host country.
If you are 65 or older, you will most likely want to continue with medicare coverage in the US. If you return to the US without having had coverage, the new premiums may be much higher than you expect. It’s another consideration.
6 Investment Accounts
We recommend keep investment accounts in the US. Almost always US brokerage accounts have lower fees, more investment options, better liquidity, and favorable tax rates. Reporting and safety may also be concerns, depending on your host country.
Depending on your tax situation and needs, you will want to consider brokerage, retirement, or college savings accounts.
You will have exposure to your host country currency. Be sure that your investment accounts are balanced so that you are not over exposed to the risks of your host country.
Be aware of loads, fees, and commissions. If you are working with a commission or fee-based financial advisor or a broker, you typically pay a sales charge or commission when you buy and/or sell mutual funds. The charge goes to the advisor for selling you the fund.
If you need help with managing your investments, we recommend using a fiduciary (fee-only) financial advisor. They are only compensated by their clients. They do not receive commissions or sell product. They are working for you and your best interests.
For more information about investing, you can download our free investment ebook for more information: https://aiofinancial.com/investing-ebook/
You are allowed to open a new account if you are residing in the following countries: Argentina, Belgium, Bermuda, Brazil, British Virgin Islands, Cayman Islands, Chile, China, Columbia, Costa Rica, Ecuador, Germany, Guam, Guatemala, Hong Kong, Israel, Jersey, Malaysia, Mexico, Panama, Peru, Philippines, Puerto Rico, Qatar, Spain, Switzerland, Thailand, United Arab Emirates, United Kingdom, Uruguay, U.S. Virgin Islands, and Venezuela.
There are other countries (Canada included) that require setting up a trust in the US, in order to open accounts in the US. There are many countries where you are allowed to keep your existing accounts if you are residing in these countries and others where you are not allowed to keep your US accounts if that is where your address and residence is located.
7 Estate planning
This is something that is easy to overlook for expats. Estate Planning includes: a will, healthcare and financial powers of attorney, living will, having correct beneficiaries on your accounts and on your property.
Cross-border estate planning can be complicated (depending on your situation). The will that you set up in the US may not be valid in your new country. You may need to have estate planning documents in your host country.
Estate planning can become more complicated if you have families in the US and abroad.
Probate and inheritance may be treated differently in your host country. It is important to speak with a professional to ensure that, if you were to die, your assets are transferred according to your wishes and that family members are not unnecessarily disadvantaged because of not understanding cross-border inheritance laws.