Author Topic: US Retirement Accounts While Living In Dubai?  (Read 3642 times)

hodedofome

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US Retirement Accounts While Living In Dubai?
« on: December 01, 2014, 08:05:23 AM »
I'm asking this for a friend. Him and his family moved from the US to Dubai this summer and will probably be there ~3-5 years. There is no income tax in Dubai and he went from making ~40k in the US as a pilot to making ~$120k in Dubai. Even though the housing is outrageous, everything else is reasonable (gas is cheap, food is the same, utilities are the same). Needless to say, they are going to be able to save a lot more money than they ever had before.

My question is in regards to taxes and retirement accounts. They pay no income tax in Dubai, I'm assuming they'll pay no income tax in the US? I'm thinking they won't pay any US income taxes...

If they don't earn any income in the US, and pay no US income taxes, then I'm thinking they also can't put money in an IRA account correct? Can they still set up a taxable account with Vanguard in the US?

CowboyAndIndian

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Re: US Retirement Accounts While Living In Dubai?
« Reply #1 on: December 01, 2014, 08:50:55 AM »
If you are a US citizen, you pay taxes on your world wide income.

So, he needs to pay taxes in the US, and hopefully contribute to a 401k/IRA/ROth.

I am not a tax guy, so hopefully the experts will correct me if I am wrong ...

pzxc

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Re: US Retirement Accounts While Living In Dubai?
« Reply #2 on: December 01, 2014, 08:55:25 AM »
I have no relevant credentials, but I believe you are 100% correct -- as a US citizen, you are required to pay income tax on any money earned anywhere in the world, even if you no longer live in the U.S.

If you are also required to pay income tax to a foreign country, you are allowed to deduct that amount from your US taxes.  So if you lived in say, the UK, and according to the US tax code you owe $50k in income tax and Britain says you owe them $20k in income tax, then you have to pay the UK $20k and the US $30k.

If the country you live in does not tax your income at all, then you owe 100% of your normal U.S. taxes on that income.

The United States of America is the only country in the world that taxes its citizens residing in another country, to my knowledge.

CuencaSolo

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Re: US Retirement Accounts While Living In Dubai?
« Reply #3 on: December 01, 2014, 10:13:52 AM »
There is a feature called the FEIE (Foreign Earned Income Exclusion) which will eventually give this person a discount on his US income tax.  If you earn $120K, and it excludes $100K from your taxable income, you end up paying, not the tiny normal income tax on $20K, but what the tax would have been between $100K and $120K (around $5000 to $5600, with little other income.)  To qualify for the FEIE, you have to be a bona fide foreign resident.  The rules on that are complicated enough that I'll just say there is a pretty clear basic explanation on the IRS website.  The executive summary is that you won't qualify in your first year of working abroad, but after that, you probably will unless you make a long visit to the US.

If you work for a US company, you are likely to be required to pay Social Security and Medicare tax as well.  Foreign employer?  Payment is optional. 

Imposing a worldwide income tax obligation on citizens living abroad (and, in the US, permanent residents who want to keep their green cards!) is trendy lighthearted fashion fun for the fiscal authorities of OECD countries.  Canada has already announced that they will start doing this, and several EU countries are at least thinking about it.  It doesn't bring in much revenue, but they get to make their citizens living abroad fill out two or more tax returns every year, and show us our place by treating us as suspected criminals.

Speaking of that, if you live, work, or invest abroad, the US also has a new regime for reporting foreign financial assets.  Two completely separate reports are required for the same information, and one of them kicks in at a very low asset level.  One is part of the regular Form 1040, and Tax Prep software like TurboTax can pretty much cope with it, while the other report is made (online only now!) to the Treasury agency charged with investigating financial crimes.  That makes me feel all warm and fuzzy, especially when I found out that my 2012 report had not been received because their website did not get along with my browser.

beltim

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Re: US Retirement Accounts While Living In Dubai?
« Reply #4 on: December 01, 2014, 11:18:33 AM »
CuencaSolo is 100% right.  To add to that explanation, your friend would only be able to contribute to an IRA with income that was not excluded under the foreign earned income exclusion.  Basically, if your friend actually pays US taxes, they would be eligible to contribute to an IRA, but if all their income was excluded, they would not. 

hodedofome

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Re: US Retirement Accounts While Living In Dubai?
« Reply #5 on: December 01, 2014, 03:58:58 PM »
Thanks for the replies. He flys for Fly Dubai, so as far as I know they are not a US company.

BigBangWeary

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Re: US Retirement Accounts While Living In Dubai?
« Reply #6 on: December 14, 2014, 04:44:45 AM »
CuencaSolo can you direct me to your source about Canada's plans to tax non-resident expats on all worldwide income?

dungoofed

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Re: US Retirement Accounts While Living In Dubai?
« Reply #7 on: December 16, 2014, 03:12:20 PM »
Hi hodedofome - please for the love of God just make sure he doesn't start investing in any investment plan offered in Dubai. Have him wire money home and put it in a taxable discount broker account, or open a brokerage account in Dubai and invest in index tracking ETFs like that.

Reports are that there are snake oil salesmen selling expensive products in Dubai. Wiring money manually into a taxable account isn't ideal but it's 100x better than the other options.