Planning Goes Global
Working and living in the D.C. metro area offers some pretty unique experiences – exposure to the country’s capital in all its splendor, a steeped cultural and arts scene, and opportunities to meet a distinctively diverse and global community. In fact, it’s not uncommon to meet folks who work at one of the many intergovernmental organizations like The World Bank or the IMF, diplomats working at the State Department or Embassy Row, or just transient folks attracted to working in the area while going about your normal course of business. As financial planners working in the D.C. metro area, we have a particular sensitivity to diverse clientele that often goes beyond U.S. borders.
But we have recently noticed a spike in new planning clients with an interest in retiring or living permanently abroad. The reasons vary from lifestyle priorities to generational wealth transfer and even disappointment with the political climate. For example, in the past year, we have advised U.S. clients with family members permanently living in Europe, professionals with State Department tours overseas deciding not to come back stateside, or first-generation Americans moving back to their family’s country of origin, to name a few. In each case, there are factors that should be considered, especially when someone has lived and worked in the U.S. for most of their lives decides to take up residency in a foreign country.
These considerations range from various tax and currency impacts on cash flows to the access of practical investment platforms. First and foremost, a person needs to understand the tax treaty between the U.S. and a foreign country, which can be highly complex. Once you take up residency, pay close attention to the rules of not only your home country but now your new country. While you may anticipate some factors, like currency exchange rates (i.e., you are paid in U.S. dollars but spend in euros or British pounds), there are others that may not be as apparent. Here are a few issues we have seen throughout our planning engagements –
Progressive tax codes may have a material impact on future cash flow. Based on tax treaties, residents are not double taxed on the same dollar of income, but they may be taxed above the U.S. tax schedule if the country of residency maintains a much more progressive tax code, as many European countries do.
To make the point, and for illustrative purposes only, let’s consider a married couple who decides to retire and take up residency in Vienna, Austria. They produce income of $120,000 from corporate pensions, rental income, and retirement account withdrawals. Austria requires tax payment in euros, and it does not recognize the married filing jointly category (only individual tax rates). The couple would pay roughly $15,824 in federal taxes living in the U.S. compared to paying approximately $31,570 if living in Austria. Further, the couple’s taxable capital gains rate on investments may increase from 15 percent to 27.5 percent, and an additional type of tax called the Value-Added Tax (VAT) of 20 percent is now introduced.
The following is a simplistic calculation intended for comparison purposes of federal income tax schedules.
Total Income $ | Income in Bracket $ | Tax Bracket % | Tax Bracket $ |
$24,800 | $24,800 | 10% | $2,480 |
$100,800 | $76,000 | 12% | $9,120 |
$120,000 | $19,200 | 22% | $4,224 |
Total Tax |
| $15,824 | |
Austria Federal Income Tax – Individual
€:USD 1.16 exchange rate
Total Income € | USD Conversion | Income in Bracket $ | Tax Bracket % | Tax Bracket $ |
€13,539 | $15,705 | $15,705 | 0% | $0 |
€21,992 | $25,511 | $9,805 | 20% | $1,961 |
€36,458 | $42,291 | $16,781 | 30% | $5,034 |
€70,365 | $81,623 | $39,332 | 40% | $15,733 |
€104,859 | $121,636 | $18,421 | 48% | $8,842 |
Total Tax |
| $31,570 | ||
Income from federal retirement programs like government pensions and social security are usually not taxable in the country of residence. However, those income sources may be added in to calculate your overall Austrian tax bracket. Private or corporate retirement pensions sources are usually taxable.
Roth IRA distributions are usually taxable in the foreign country of residence.
- Many U.S. domestic investment platforms, like Vanguard or Fidelity, do not offer similar international investment platforms, mostly due to the Foreign Account Tax Compliance Act (FACTA). Financial institutions have determined that tax and regulatory liability is too onerous to offer such platforms. Schwab, however, has established a unique platform dedicated to American expatriates overseas that makes it seamless to invest.
While some of these nuanced issues may not apply to your unique situation if you plan to establish foreign residency, you will need to identify your own unknown unknowns. As retiring abroad becomes increasingly popular, it would be worthwhile working with a CPA well-versed in dual residency situations. As always, reach out to West Financial to discuss your specific situation or if you would like a referral to a trusted CPA partner.
Sources:
https://www.taxesforexpats.com/country-guides/austria/us-tax-preparation-in-austria.html
https://taxsummaries.pwc.com/austria/individual/income-determination
https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca
https://international.schwab.com/us-expat-investing
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