Definition and Pros/Cons of Living Abroad

What Is an Expatriate?

An expatriate or expat is a person who moves to another country long-term to live and work or to retire. Many American expats are retirees or have relocated for a job. Increasingly, they are mobile workers who can work from anywhere using the Internet.

Relatively few U.S. expats renounce their U.S. citizenship, despite the fact that the U.S. is the only major nation that taxes the income of citizens who live and work overseas. They, or the companies they work for, must obtain the appropriate residency or work permits for the country they live in.

Understanding Expatriates

You would be considered an expatriate if your employer sends you from your job in its Silicon Valley office to work for an extended period in its Toronto office.

Many workers take a position outside their home country, either independently or as a work assignment. The employer assigning the work can be a company, university, government, or non-governmental organization.

U.S.-based businesses often offer their expatriate employees incentives including higher pay, relocation assistance, and housing allowances, especially if they are moving to a country with high living costs.

Living as an expatriate can be exciting, but it can also be an emotionally difficult transition. It involves separation from friends and family while adjusting to an unfamiliar culture and work environment. This is one reason behind the higher compensation offered to these migrant workers.

Special Considerations: Retiring Abroad

A growing number of U.S. retirees are choosing to live overseas, often in countries where living costs are substantially lower.

People are motivated to relocate abroad at an older age for other reasons, including better climate, access to beaches, and a more relaxed lifestyle. But it can be tricky to navigate the necessary long-stay visas and adjust to the language and cultural differences.

A common choice a retiree expat must deal with is between permanent residency and dual citizenship. Neither dual citizenship nor residency will get you out of filing a U.S. tax return every year.

You may also have to file an income tax return in your country of residence although most deduct the amount American residents pay to the U.S. via treaties that minimize double taxation.

You face a tough decision that will require some soul searching and research if you’re a retiree or near-retiree who’s on the fence. You might consider a trip abroad or maybe several to test the waters before you make a decision.

Social Security benefits travel abroad with you but Medicare does not.

Foreign Earned Income Exclusion

The U.S. taxes its citizens on income that’s earned abroad. But the U.S. tax code contains provisions that help to reduce tax liability and avoid double taxation. Taxes paid in a foreign country can be used as a tax credit in the U.S. which reduces the expat’s tax bill when applied against it.

The Foreign Earned Income Exclusion (FEIE) allows expats to exclude foreign earned income from their tax returns up to a certain level. The amount is indexed to inflation.

Foreign Tax Credit

The FEIE doesn’t apply to rental or investment income. Any income earned from interest or capital gains from investments must be reported to the IRS. The Foreign Tax Credit (FTC) is a provision that ensures that expats aren’t double-taxed on their capital gains.

The FTC provides a dollar-for-dollar credit against taxes paid to a foreign country so an expat would only have to pay the difference between the foreign tax and the U.S. tax rate. In other words, the foreign tax rate paid on capital gains would reduce the U.S. tax rate. However, they’d owe the full tax to the U.S. government if they paid no tax on capital gains to the foreign country.

The expat would forfeit that amount if the income tax paid to a foreign government far exceeds the amount of the credit because the foreign tax rate far exceeded the U.S. rate. The credit can be carried to future years, however.

Expatriation Tax

People who have renounced U.S. citizenship are referred to as expatriates for tax purposes. They’re subject to an exit tax known as an expatriation tax.

The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. residency if one of the principal purposes of the action is the avoidance of U.S. taxes, according to the Internal Revenue Service (IRS).

However, for this tax to apply, individuals must meet certain criteria for net worth, income tax liability, and the length of residency in the U.S.

Advantages and Disadvantages of Becoming an Expatriate

Living and working in another country for an extended period can have benefits. They can range from new experiences and adventure to more practical considerations like a lower cost of living or being closer to extended family abroad.

Depending on where you settle, you may also get government perks like free healthcare and education and more favorable taxation.

There are also some potential drawbacks. You’ll still have to file tax returns each year and may have to pay taxes to Uncle Sam even on income earned in your new country.

You might also be a long way from home. This can make seeing friends and family more costly and difficult and time zone differences can interfere with linking up by phone or video chat.

Learning a new language and customs can also be difficult for some and certain items or products that you like may not be available in the country to which you move.

And not all countries enjoy the same level of political and economic stability that the U.S. does.

The Bottom Line

Expats must typically navigate a complex web of tax rules and regulations that can be challenging to understand and comply with. The U.S. requires citizens abroad to file taxes with the IRS although tax credits and income exclusions minimize or eliminate double taxation. Think it all through before you make a decisive move.