Households of FI-Matt & Megan Get International Tax Tips From Dave McKeegan
Episode 245
Episode Guide
Episode Timestamps
ChooseFI Podcast Episode Show Notes
Episode Summary: This episode dives deep into the complexities and nuances of managing taxes and investments for U.S. citizens living abroad, particularly dual military families. Listeners gain insights into the financial implications of obtaining a green card, capital gains tax liabilities when selling overseas properties, and the challenging reporting requirements under FATCA. The discussion highlights the importance of understanding how different investments, such as mutual funds in various countries, might be taxed differently in the U.S. Additionally, the episode emphasizes actionable strategies like utilizing Roth IRAs as emergency funds and highlights the pros and cons of maintaining U.S. citizenship while abroad.
Key Topics Discussed:
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Podcast Intro:
- Introduction to ChooseFI and its focus on financial independence.
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Understanding Tax Implications:
- Discussion on the tax implications of dual military families with one partner serving abroad.
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Selling Property and Capital Gains Tax:
- Consideration of capital gains tax when selling overseas properties, especially in relation to green card applications.
- Key Insight: "Selling your property before obtaining U.S. residency can save you on taxes!"
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FATCA and Reporting Requirements:
- Overview of FATCA and its requirements for Americans with accounts overseas.
- Key Insight: "Don't fear taxes: Form 114 is straightforward!"
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Utilizing Roth IRAs:
- Strategies on setting up Roth IRAs as emergency funds and the benefits of early investments.
- Key Takeaway: Set up a Roth IRA and consider using it as an emergency fund.
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Conclusion and Call to Action:
- Recap of the importance of understanding tax implications and building a solid financial strategy while living abroad.
Actionable Takeaways:
- Consider selling overseas properties before obtaining U.S. residency to avoid capital gains taxes.
- Review and consolidate mutual funds to ensure they align with U.S. tax reporting requirements.
- Set up necessary tax forms before selling properties as a Green Card holder.
- Utilize Roth IRAs as a financial strategy, allowing access to contributions in emergencies.
Key Quotes:
- "Start your financial journey now; today is the second-best time to begin!"
- "Timing your green card application can have significant tax ramifications."
Discussion Questions:
- What would be the financial implications of maintaining a U.S. tax residency while living abroad?
- How can understanding international tax laws benefit expats financially?
Related Resources:
Social Media Snippets:
- "Watch out for capital gains tax when considering your green card application! #TaxStrategy #FinancialIndependence"
- "Starting your financial journey today is one step closer to your goals! #FinancialIndependence #InvestInYourself"
Podcast Description: Dive into the complexities of tax and investment strategies for U.S. citizens living abroad. Understand the implications of obtaining a green card, the ins and outs of capital gains tax, and how to navigate financial independence while managing overseas investments.
Navigating Taxes and Investments for U.S. Citizens Living Abroad
For U.S. citizens, particularly those living abroad or in dual military families, managing taxes and investments can present unique challenges. This guide provides actionable strategies and insights to help you navigate the complexities associated with financial independence while residing outside the United States.
Understanding Tax Implications of U.S. Citizenship Abroad
When you become a U.S. citizen or gain legal residency, you are subject to U.S. taxation on your global income. This means understanding how various international tax laws can influence your financial standing.
Obtain Your Green Card Wisely
Applying for a green card has significant tax implications. Ensure you know the rules that come with it:
- Capital Gains Tax: You could be liable for capital gains taxes on overseas properties after obtaining U.S. residency. Aim to sell any overseas property before you acquire a green card to avoid unexpected tax bills. For instance, if you expect to sell a property with significant appreciation, consider timing your sale strategically to minimize tax liability.
Action Item: Sell overseas properties before obtaining U.S. residency, if possible, to avoid capital gains taxes.
FATCA and Reporting Requirements
The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report accounts held by U.S. citizens to the IRS. This regulation can complicate your financial dealings abroad and increase the paperwork involved.
Don’t Fear Tax Forms
Many expats find tax forms daunting, but they are straightforward to fill out. For instance, the FinCEN Form 114 is necessary for reporting foreign bank accounts. This form may seem intimidating at first, but with proper guidance, you can complete it with ease.
Takeaway: Regularly fulfill the required tax forms, including Form 114, to maintain compliance while enjoying your overseas life.
Strategies for Tax-Deferred Accounts
When living abroad, utilizing tax-advantaged accounts is beneficial for building wealth without incurring immediate tax burdens.
Set Up a Roth IRA
Using Roth IRAs can be an excellent strategy for accessing tax-free growth:
- Roth IRAs allow for after-tax contributions, meaning you can withdraw your principal at any time without penalty.
- Consider treating your Roth IRA as an emergency fund. By investing in low-cost index funds within this account, you capitalize on long-term growth while ensuring liquidity for unexpected expenses.
Action Item: Set up a Roth IRA and utilize it as part of your emergency savings strategy.
Investing in International Markets
Investing internationally can increase your portfolio’s diversification. However, one must understand how various investments are taxed to optimize your strategy.
Choose Proper Investment Vehicles
Foreign mutual funds might be subject to different tax treatments. For example:
- Passive Foreign Investment Companies (PFIC): Some foreign mutual funds could be classified as PFICs, subjecting you to additional reporting and potential asset penalties.
- U.S.-based ETFs can offer a more favorable tax treatment. Opt for Vanguard or similar funds that comply with both U.S. and international tax requirements.
Takeaway: Regularly review your investment portfolio and ensure compliance with tax regulations in both the U.S. and your country of residence.
Maintaining Compliance While Living Internationally
Keeping up with tax regulations can feel overwhelming, but you can simplify it with a proactive financial strategy.
Multiple Financial Accounts
Consider maintaining multiple bank accounts in both the U.S. and your country of residence. This setup allows you to manage expenses more effectively and reduces reliance on international bank wire transfers, which can incur high fees.
Action Item: Open local accounts in your resident country while maintaining your U.S. accounts for added flexibility.
Final Thoughts on Financial Independence Abroad
Pursuing financial independence while living abroad involves understanding and strategically managing taxes and investments. Here are some final recommendations to ensure your success:
- Start your financial journey now; today is the second-best time to begin!
- Consider the potential tax ramifications of obtaining your green card before completing property sales.
- Utilize tax compliance tools and ensure you understand forms necessary for reporting foreign accounts.
- Leverage tax-efficient investment strategies that allow for growth without immediate tax liabilities.
- Lastly, stay informed on both U.S. and international tax regulations to make well-informed financial decisions.
By implementing these strategies, you can take control of your financial independence journey while living abroad, ensuring that you build wealth effectively and efficiently.
Households of FI-Matt &Megan
What You'll Get Out Of Today's Show
- Matt and Megan are a dual military family on the path to FI. Matt is serving in the UK Royal Navy and Megan is serving in the US Navy, making their tax situation unique.
- Currently, they plan on having Matt get a green card, allowing him to work in the US, while Megan finishes out her Navy career to earn a pension and then move abroad in about seven years.
- Once Matt gets his green card, he will be taxed like any other US citizen. He owns an apartment in the UK that he would like to sell. Dave McKeegan notes that since there is no wealth tax in the US, Matt will not be taxed on his assets, but once he gets a green card or meets the substantial presence test, he would potentially have to pay capital gains tax on the sale of the apartment so it would be best to sell it first.
- Due to the Foreign Account Tax Compliance Act (FATCA), every bank around the world is required to report US citizen account information to the US Treasury Department. US citizens are also required to report accounts on a FinCEN 114 form and assets held overseas are subject to capital gains taxes.
- Dave wanted Matt and Megan to be aware that mutual funds held outside of the US can often be viewed as passive foreign investment companies. Any investments overseas should be US compliant as well. Vanguard has a number of retirement funds that report correctly to both the US and UK and are exempt from taxes.
- Matt and Megan are interested in how the can best take advantage of the US tax system and simplify it for themselves. To reduce their taxes, Dave advises Matt to physically give up his green card once they move abroad so that they can place money in international investments under Matt's name and he won't be taxed like he is a US citizen anymore.
- As long as their assets are less than $2 million, leaving the US will not trigger an exit tax.
- Depending on income, where their assets are held, and if they have children, their US tax filing status may change to take advantage of higher exemptions, but they should sell the UK property before filing "married filing jointly" as long as he doesn't already meet the substantial presence test.
- Matt may qualify for a tax-free UK pension when he retires from the Royal Navy but if he has a green card, he will need to pay US taxes on his pension until they move overseas and he gives up the green card.
- Dave McKeegan has moved around the world and is currently living in Costa Rica. Costa Rica is one of a number of countries that only tax sources of income earned within that country. As his business is located in the US, Dave pays US taxes. If Matt and Megan were to move to a country with tax laws like Costa Rica, they would not pay income tax to that country on their UK and US pensions.
- Other countries have income tax rules that depend on how much time is spent in that country. So it's possible to slow travel or split the time spend in a few countries and not pay income tax to the countries visited.
- Countries that tax their citizens living abroad are the United States, Eritrea, and North Korea.
- While there may be tax advantages to living abroad and giving up US citizenship, Dave has decided that he benefits of retaining citizenship far outweigh the benefits of not paying taxes and the risk of not being let back into the country.
- Wyoming is an easy state to incorporate a business and there's no state income tax. If also living outside of the US for 330 days a year, you can be eligible for the foreign income exclusion and exclude $100,000 of income from taxation.
- Alternatively, Matt could set up an online business overseas and pay Megan a salary up the foreign income exclusion amount and also avoid self-employment taxes.
- Living in Costa Rica, Dave's children have been learning through a combination of the local international school, homeschooling, and the Simple StartUp entrepreneurial program he's been running for a home school group. He is able to have conversations about business and money with his kids about money and they have become interested in investing as well.
- Though Dave and his family primarily rented homes while moving around the world, the rental market in Costa Rica made conditions more advantageous to buy. When they travel back to the US for extended periods, they can rent their home in Costa Rica out.
- Diversification doesn't just apply to a stock portfolio. You can be diversified in passports, income streams, and properties from other countries. Spreading your bets around different countries can make sense.
- Dave discussed some of the issues expats have opening local bank accounts as US citizens. Matt and Megan have been using Revolut to more easily move money around between countries.
- Opening up a Roth IRA is something Dave suggested Matt and Megan could do to stash away some tax-free money and have ready access to the principal later.
- Health care coverage overseas was another area Dave suggested they look into, although health care is frequently more affordable overseas. International policies are always an option to look into as well. The policy Dave has for his family cots $7,000 a year and provides coverage everywhere except for the United States.
- Another helpful tip Dave has for expats is to always have a couple of different bank accounts to avoid issues with expiring cards or the need to access larger amounts of cash.
- Opening and using US credit cards and travel rewards is also possible overseas. Dave uses a company called Mailbox Forwarding to receive and scan his mail.
- It can be a hassle to try and say you aren't a resident of some states anymore avoid paying state income taxes. South Dakota does not have a state income tax and only requires residents to be there one day per year to maintain residency.
