Taxes for FIREd Mustachians with US monies and residing abroad

[Paul der Krake]

The typical FIRE plan for US early retirees consists of having high earning years, then paying next to no taxes in retirement by living off dividends and long term capital gains in a low tax bracket.

I'm interested in hearing the stories of people who have earned their money in the US, but reside full-time abroad. Note: not interested in permatravelers who never establish residence anywhere, that's already widely documented. I want homebodies who either live somewhere full time, or maybe split 50/50.

Does your new country of residence have a tax treaty with the US?
How did you find accurate information on calculating your tax liability both in the US and current country?
What does your tax return look like? How are you being taxed?
How does your new country determine residence, and how did you obtain it?
How fluent in the language of your new country are you?

[ZiziPB]

Following because I am very interested in this information as well. 

I am planning to move to Poland once I FIRE but my money is staying in the US.  I have a Polish passport and speak Polish so residency and language are not an issue for me.

There is an old tax treaty between the two countries and a new one that has been waiting for Senate approval for a few years now.

I'm thinking of finding an accounting firm that specializes in expat tax returns to do my returns the first year and after that I should be able to follow the pattern on my own.

[canga]

Full disclosure -- still a working expat with a decade living overseas. I love it, but it's not all fun and games. Unfortunately I've seen many people lose it after about six months, pack their bags and head home to the USA.

I'd recommend you spend an extended stay abroad (3 months+) before deciding to permanently relocate overseas. Living overseas is substantially different than traveling overseas. It's not particularly enjoyable to spend 120+ hours at the immigration department your first year, do visa runs every few weeks, have to learn to drive again because they don't honor your drivers licence, or spend 6 hours and 3 trips to the bank to open a checking account only to find they didn't give your wife access to it. There's a reason the USA stock market performs as it does -- in the USA we get sh*t done. Much of the rest of the world is on a permanent efficiency holiday. If you're a Type A personality then you'll need to take up daily meditation as a coping mechanism.

That said, it's extremely rewarding here in a stoic sort of way. It's way too expensive to eat the food you're used to, so you eat like the locals and shop where the locals shop. You live in a small apartment, and you can never get rid of the cockroaches, so you don't need negative visualization and you've effectively stopped hedonic adaption. You can't find clothing or shoes that fit, so you don't buy anything. There are no internationally accredited hospitals, so you just fight through any medical issues.

But you'll grow as a person, find a completely different world view, have once in a lifetime experiences, and become friends with some of the greatest people you could ever hope to know.

What area of the globe are you interested in? South America, Europe, Austraila / NZ, Asia? That may help get you more relevant responses.

1. Does your new country of residence have a tax treaty with the US?

No.

2. How did you find accurate information on calculating your tax liability both in the US and current country?

Don't trust a USA based tax preparer because they generally don't have experience in expat tax returns. Pay a local tax preparer $2,000+ to file USA taxes. After the first year or two you can fill it out yourself. Local tax forms can be filled out in 15 minutes.

3. What does your tax return look like? How are you being taxed?

FEIE based on bona fide residency (can be filed the year after meeting the physical presence test). Need to keep foreign bank account holdings under $10k to limit FBAR reporting requirements. This country does not tax investment returns.

You can have over $70k investment income federally tax free when living in the USA. Living overseas can save you huge amounts on income taxes, which is not much of a benefit after RE. Make the choice to live overseas because that's the lifestyle you want, not because it may be cheaper. I could certainly save a lot of money by relocating to a number of other countries, but it wouldn't make me happier.

4. How does your new country determine residence, and how did you obtain it?

This is going to be extremely location specific. This country no longer accepts foreigners as permanent residents unless you marry a local citizen.

5. How fluent in the language of your new country are you?

Can order food, coffee, beer (the essentials), and hold simple conversations over the phone and in person. Recommend Pimsleur, Glossika and Anki to get started. 

[Paul der Krake]

I am looking primarily at European countries first, and residency there isn't an issue for me either. Ultimately I would like to live in one place for 4-6 years, then move, expat style. I have met tons of expats who do this, but they work for a living and don't get to be creative around taxation, since they just pay their taxes wherever they happen to get paid.

Consider the tax treaty between the US and Spain:
https://www.irs.gov/pub/irs-trty/spain.pdf

It's pretty dense legalese, and presupposes intimate knowledge of both systems. Not exactly easy for someone shopping countries around.

[ZiziPB]

Yes, all the tax treaties are like that :-(  I'm a lawyer and still don't understand most of the provisions!  I think the only solution is to use an accounting firm to get it right.

ETA: the other thing to look into is how the health insurance premiums are calculated in the country you want to reside in.  In a lot of European countries the premiums are a percentage of your income (question whether it's active or passive income) and can be hefty.

[Malaysia41]

ZiziPB called me over here...

We live in Italy.

Does your new country of residence have a tax treaty with the US?
Yes. It applies to income tax. - ordinary, cap gains, dividends, rents, etc. 

How did you find accurate information on calculating your tax liability both in the US and current country?
Hoo-boy. Okay, here it is.

I started with some expat forums like Expatexchange.net, which has some very well informed forum members who mainly know about how pensions and SS are taxed. Also, PDFs put out by KPMG and other big firms that produce those docs for professionals who are relocating overseas on some assignment. Lastly articles on random sites (reader beware!!!)

Ultimately, however, when I want to be sure about the facts, I go to the government website http://www.agenziaentrate.gov.it/. Eventually I  stopped reading articles, and even the KPMG PDFs because they failed to get the fine details right - and it's the details that often matter most.

For example, this article on justlanded made us seriously consider putting off moving here, as it states that by registering as residents at any time during the year, we'd be taxed as such. That would have been bad as we planned to move in August and that would put us here less than 183 days, which was my understanding as the min time in country to be taxed as a resident.  So... that set off about a week of research on my part to determine the right answer. The English portion of Agenzia Entrate is not detailed enough to discover this, so I had to go into the actual tax code, which is of course, written in Italian.  My Italian is conversational, so I google translated it, and then verified I was understanding correctly with our buddy/tax guy Mauro.

Ai fini delle imposte sul reddito sono considerati non residenti coloro che non sono iscritti nelle anagrafi comunali dei residenti per la maggior parte del periodo d’imposta, cioč per almeno 183 giorni (184 per gli anni bisestili), e non hanno, nel territorio dello Stato italiano, né il domicilio (sede principale di affari e interessi) né la residenza (dimora abituale).

For the purposes of income tax they are considered non-residents who are not registered in the municipal registry of residents for most of the tax period, ie for at least 183 days (184 for leap years), and have not, in the territory of Italian State nor the domicile (principal place of business and interest) or the residence (habitual residence).

So that's just an example. It was a good experience, as one of the justlanded commenters and I are now friends on facebook.  She's an opera singer from the US and I can't wait to meet her whenever I find myself in Torino next.

So - main thing is - if you want to get the taxes right, get an advisor, and be willing to roll up your sleeves and do research with original sources (just like you do with irs.gov - thank goodness that site is so clear).

What does your tax return look like? How are you being taxed?
We are too young for social security or any pensions, so I haven't done a lot of research into those. Reading articles forums, however, I see there is a lot of difference of opinion on how they are taxed.

Here are the taxes that I know apply to us: IRPEF (income tax), IVIE (foreign real estate ASSET tax), and IVAFE (foreign investment ASSET tax).

IRPEF - the income tax is one I watch closely. Italy has a very steep progressive tax schedule with just a few deductions. For our family, we'll be able to do approx 10k€ in deductions, but I suspect we'll land in the 27% tax bracket. With the tax treaty, we will deduct whatever we pay for US income taxes from the IRPEF bill.

IVIE and IVAFE. Some Italians love to brag that they don't have asset taxes - like the lousy French do. Ha ha! I'd laugh along with them ... if I didn't know for certain that this is untrue. Any Italian tax resident who holds foreign assets is subject to yearly ASSET taxes. IVIE is a tax on real estate - based on assessed or 'cadastral' value. It's .76%. Fortunately, this tax is offset with any local property taxes paid. So this should net out to zero for us, as both of our properties are in very high prop tax locations in the US. IVIE is an asset tax on financial holdings. It's .2%. I've decided to consider it an addition to any management fees on our portfolio holdings. Eh, whadda ya gonna do?

So, even though we've been here since Aug 2016, we won't owe taxes until the 2017 tax bill is due. I'm expecting it to be around $6-10k after the US taxes and prop taxes are deducted.  Meh - it's the cost of getting to experience this beautiful city, and establish a home base to explore Europe from.

How does your new country determine residence, and how did you obtain it?
First you need a visa. A signed and registered contract for living arrangements are required so I had to fly to IT and make that happen.   Then you have to apply for the visa at an Italian embassy in person. That was a whole ordeal in and of itself.

Within 8 days of arrival you have to apply for a permesso-di-soggiorno (permission to stay). Then you register at the questura (police station) for multiple rounds of IDK what, and each time get berated by Claudio for not speaking Italian well enough. (I secretly loved it).  We still don't have our residency. Our last time at the questura was in Sept when we finally were given a date for our residency appointment - Feb 16. This has made things complicated (can't open a local bank account so have to pay all bills in cash but at least we can do that at the post office, and our landlord is kind enough to come by to collect rent(in cash) once a month).

How fluent in the language of your new country are you?
Improving. I'm in classes 4 hours a day currently. Learning a new language is just about the most difficult project I've ever undertaken. But I'm a goat. I've a plan and I'll stick to it - day by day  - and I'll keep going until I'm fluent. It's taking a long time. A LONG LONG TIME. AND MY BRAIN IS FATIGUED! ...  but going out on bar crawls with my classmates and teachers - and telling jokes in Italian (last tuesday - one 'barziletto' landed / one failed big time ) - all move me forward toward fluency. I hope I'll be sufficiently fluent in a month for our residency appointment with the questura.

[ZiziPB]

M41, thank you!  Fantastic response and a lesson for all us considering such a move.

[Paul der Krake]

Awesome post! Thank you, Malaysia41, for sharing your experience.

I have a French passport and the wealth tax over there is giving me shivers... the more I read the rules the less certain I am about what would and wouldn't be taxable. Apparently newcomers don't pay it for 5 years, but as a citizen I am not sure I qualify as a newcomer, even though I left the country 20 years ago. I could flip flop every 5 years too...

The idea of moving first and figuring out my liability after the fact is insane, at least to me.