If you’re contemplating a move out of the U.S., think hard about why you want to go. Is it just the right time to retire to the tropical beaches of Costa Rica or to the European charm of Lisbon? Or is it to avoid paying taxes?
Those trying to avoid taxes may need another plan. The U.S. is one of the only countries in the world that taxes its citizens no matter where they live.
If you want to get a golden visa somewhere because you think it’s going to be the best thing since sliced bread for tax savings, that’s not going to happen unless you give up your citizenship as well, which very few are willing to do.
Some people began to look at how to acquire passports from other countries based on their heritage or through golden visa programs, in order to buy property outstide the US. For example, the Quebec Investor Immigration Program will offer a work permit to a wealthy investor for C$1.2 million (US$877,204), allowing them to apply for permanent residency after a year.
Avoiding Double-Taxation
It’s important to know the implications of any move you make. The first step is learning whether or not a country you want to move to has a treaty with the U.S. that would limit your overall tax bill.
Tax treaties are agreements between the U.S. and another country that spell out who gets to tax what. It’s a good rule of thumb is that a U.S. citizen is going to pay the higher of the two taxes.
A treaty could, for instance, say that gains from a real estate sale will be taxed in the country where the property is located, while the sale of something intangible—such as shares of stock—could be taxed in the country where the person physically resides.
Brazil and Argentina are two examples of countries that don’t have a treaty agreement with the U.S.
That doesn’t necessarily mean that U.S. citizens who pay taxes in Brazil won’t get any credit for those taxes against their U.S. income tax liability and vice versa. It does mean that navigating double taxation for those taxpayers will likely be more difficult than it would otherwise be if a treaty was in place.
Avoid Onerous Taxes on Investments
Critical to understanding the impact on your taxes is to understand the tax status of your investments. Americans are subject to so-called anti-deferral rules, which are meant to discourage U.S. citizens from investing in foreign funds that aren’t transparent to the U.S. Internal Revenue Service.
For that reason, Americans who move abroad need to know the U.S. tax status of their investments. It’s also important to be careful of your new jurisdiction’s rules, as you don’t want to trip those up either.
A good example is in the U.K., where residents who invest in funds outside the country could pay taxes on capital gains as high as 45% if their offshore funds have not been approved by the U.K.’s tax reporting regime. For funds that are approved, the capital gains taxes are just 20%.
American clients who move to the U.K. are advised to either invest in U.S. funds that have U.K. reporting status, or avoid funds altogether and just invest directly in the underlying stocks.
Estate Taxes Are Another Issue
U.S. citizens moving abroad actually have to consider whether the country they are moving to also has a treaty with the U.S. covering estate taxes in addition to a treaty covering income taxes.
These taxes on the property of a deceased individual can be complicated because some countries, such as the U.S., impose estate taxes on the deceased’s assets and property, while other countries impose inheritance taxes on the recipients of the deceased’s wealth. Treaties are difficult to hammer out between countries if they take different approaches to taxation.
Another issue is that countries have different legal systems. U.S. estate plans almost always involve the use of trusts, for instance, but a lot of countries don’t recognize these vehicles. Civil law countries such as Spain and Germany have a really hard time understanding trusts.
In practice, that means trusts are “completely disregarded” in some countries, and in others, they are treated differently, giving rise to unintended consequences.
Advisory Services are offered through MRA Advisory Group, a Registered Investment Adviser. This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. The investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security, or (ii) tax or legal advice.