Clients Must Consider Taxes Before Moving Overseas, Advisors Say
The political turmoil of the U.S. may be inspiring some wealthy clients to move abroad. Logistics aside, what should be their tax questions? One important thing that expats need to note is that, even if they do leave the U.S., that doesn’t mean their IRS tax reporting requirements are […]
The political turmoil of the U.S. may be inspiring some wealthy clients to move abroad. Logistics aside, what should be their tax questions?
One important thing that expats need to note is that, even if they do leave the U.S., that doesn't mean their IRS tax reporting requirements are eliminated.
Expats may become subject to additional U.S. foreign reporting requirements, with non-compliance penalties that start in the five figures, they say.
“Understand how the new host country taxes,” Dawson said. “It can be very complex for wealthy individuals who might be taxed in a variety of ways beyond earned income taxes. Learn about what is taxable and the tax rates for the major tax areas: earned income, investment income, social or payroll taxes, capital gains tax, wealth tax, property tax and so on.”
Advisors say this has become an important issue, as they've seen clients sometimes move to other countries in search of better tax treatment.
“Wealthy Americans are flocking to countries like Portugal for its 10-year tax break on foreign income ... Italy for a simplified flat tax on global earnings and the United Arab Emirates for its zero income tax,” said Megan Slatter, wealth advisor at Crewe Advisors in Salt Lake City. “These countries offer appealing tax incentives.”
“There has been an uptick in the number of people leaving the U.S. due to political concerns,” said Libby Dawson, senior principal at Cerity Partners in San Francisco. But “a small number, with the very large majority moving for ... new work opportunities or to be close to family in other countries.”
In a recent report to Congress, however, the National Taxpayer Advocate’s office said that taxpayers abroad face significant challenges in meeting their U.S. tax obligations, including time lags for correspondence and administration and being “plagued by a complex tax code and declining levels of IRS customer service. They can be liable for severe penalties for failing to file or incorrectly filing their tax returns and complicated international information returns, of which they may not be aware.”
Miklos Ringbauer, CPA and treasurer/secretary of the CalCPA board of directors and founder of MiklosCPA in Los Angeles, said that the U.S. does tax citizens on worldwide income regardless of where the taxpayer lives but that “taxpayers may be able to utilize their expat status to exclude some or all their earned income.”
“Expats with self-employment income can be subject to a Form 8858 filing requirement [from] having a ‘foreign branch’ classification due to the 2017 TCJA tax law changes,” Ringbauer said, adding that U.S.-sourced income such as dividends, interest, business income and more will be subject to U.S. income tax.
A recent Supreme Court decision has also worked against expats: Moore v. United States “allows the U.S. to tax unrealized foreign earnings, even before you see a dime of that income,” Slatter said. “Foreign earnings can be taxed retroactively, even if you haven’t pocketed the cash.”
Slatter added that the Farhy case—in which a federal appeals court recently overturned previous decisions and ruled that the IRS had authority to assess the owner of two Belize-incorporated entities—is another wake-up call for any client with foreign investments or who's considering expatriation.
Overall, clients should educate themselves and broaden their horizons, advisors say.
“Focus on three key tax factors: U.S. exit taxes that kick in if your assets are substantial, ongoing U.S. tax obligations since the IRS taxes global income no matter where you live, and foreign tax laws that can vary widely and impact your financial strategy,” Slatter said.
The U.S. has tax treaties with many nations, which can work for and against clients who move, advisors say. “These agreements between countries can prevent double taxation on your income and capital gains. And before you move, consider placing your assets in trusts or holding companies in tax-friendly countries like the Cayman Islands, Switzerland or Singapore,” Slatter said.
Clients might also try expanding their idea of “overseas.”
“Don’t overlook ... Puerto Rico or the U.S. Virgin Islands, which offer big tax benefits, such as 0% capital gains in Puerto Rico, while letting you keep U.S. citizenship and avoiding foreign tax complexities,” Slatter said. “U.S. territories offer simplicity and solid perks. Foreign relocations offer more savings but greater complexity.”
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