How to help a client retiring abroad think about taxes

Have clients dreaming of retiring to foreign shores? Or are those dreams of tropical beaches and lower costs of living your own, for your post-accounting life?

More Americans are choosing to live at least some of their golden years outside of the United States. The Social Security Administration reported 413,000 people, an increase of 40% from 2007 to 2017, collected their Social Security income at foreign addresses, according to CBS News.

Many find that overseas retirement can be more affordable than staying in the United States. International Living magazine has been crunching numbers around the most affordable retirement locales for almost three decades. This year’s list of best all-around value when it came to cost of living were Cambodia, Vietnam, Bolivia, Peru, and Ecuador, all of which can offer retirements that can fit $1,000 to $2,000 monthly budgets.

But while retiring overseas may be a dream come true for the adventurous, it is not without tax and financial planning complications. Here’s how CPAs can help their clients wade through the particulars of a retirement abroad.

Talk in advance about tax liabilities. Many people retire in places outside the United States and believe they’re finished with their annual dealings with the IRS, said Dan Prescher, a senior editor with International Living who has spent the last two decades with primary residences in Latin America.

But that’s not the case, and it’s important to tell clients that not only will they have to report income from investments or new endeavors, they will also be required to pay U.S. taxes.

“U.S. citizens are obligated to report their worldwide income no matter where they make their money,” Prescher said.

Many retired expatriates leave the United States and want to start a side business or have income flow through from investments without realizing that money will be taxed, said Katelynn Minott, CPA, a senior partner at Bright!Tax, which specializes in expatriate tax advice. CPAs should mention this to clients who are considering such moves, in order to avoid any unexpected tax obligations down the line.

Another common mistake retirees make is assuming they’ll get a tax break when living overseas, as is the case when U.S. citizens are working overseas. However, while they may have heard of the Sec. 911 foreign earned income exclusion, they may not realize that it applies only to income earned from services performed by the individual during the year, not to pension or retirement account income.

“There are definite tax breaks,” she said. But “those don’t necessarily apply to retirement income.”

Think through what a life abroad looks like. CPAs should talk with clients about the need to have money set aside to handle the startup costs in a new country, Prescher said. He also suggests that retirees debating moving overseas visit during the off-season and spend enough time to get an idea of what day-to-day life is like. They should investigate health care and banking systems, and find out whether they’re truly OK if a beach town turns into a ghost town once seasonal vacation crowds go home.

Many expatriate communities are happy to share details, and Prescher recommends tapping into online communities to help answer questions.

Find a tax and financial planning professional on the other side. Many times people who are moving overseas are so focused on how they’ll square away the U.S. side of the tax equation that they neglect to think about the expectations of their new home country, Minott said.

They “don’t necessarily take into consideration the tax that they potentially have to pay in their new country of residency,” she said.

Minott frequently refers her clients to tax professionals in their new countries of residence. CPAs can help their clients by asking in their own networks, or through professional organizations, for services and resources clients can use overseas to ensure they have a full understanding of their tax liabilities.

Be careful with international investments. John Ramdeen, CPA, of Greenback Expat Tax Services, said many people living overseas may work with an investment adviser in their new country, but those professionals aren’t necessarily aware of U.S. tax rules.  

Many of these investment advisers aren’t well versed in U.S. reporting requirements, and Ramdeen has had clients who found out too late about a different set of rules for foreign investment vehicles. The additional reporting, which can significantly add to tax preparation costs as well as carry high U.S. income tax rates, are triggered when Americans living abroad might have what’s considered passive foreign investment company (PFIC) income. Examples of this are non-U.S. mutual funds, exchange-traded funds (ETFs), and unit investment trusts (UITs), Ramdeen said. 

“It creates additional compliance reports and can really cause their taxes to skyrocket,” Ramdeen said.

He suggests that U.S.-based CPAs talk with any clients considering an overseas retirement about this possibility, so they’ll know ahead of time what to watch out for. CPA financial planners can also help clients choose investment strategies that take tax implications into account in advance. 

Be aware of foreign bank disclosures. When most people move overseas, they want to have a local bank. But that has reverberations in the United States, with the IRS wanting to know details of their foreign financial accounts as part of the Report of Foreign Bank and Financial Accounts (FBAR) reporting requirements.

Talk to clients moving out of the country about these requirements, so that they’re aware of them well in advance and won’t be caught off-guard, Minott said.

Know what you don’t know. Finally, CPAs should be upfront with their clients if they aren’t well versed in handling complex tax filings of Americans living abroad, Ramdeen said.

Many intricate rules and regulations come into play, and the average CPA may not be aware of things that a professional with a robust client list of expatriates knows.

“They need to realize that ‘I might be out of my element here,'” Ramdeen said.

In those cases, consider reaching out to a CPA with that experience to help your client, Ramdeen said.

— Sarah Ovaska is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chis.Baysden@aicpa-cima.com.