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Consider Taxes Before Retiring Abroad

Physicians Considering Retirement in Another Country?

By Rick Kahler CFP®

One way for a retiring doctor to stretch a retirement nest egg is to relocate your retirement nest. Finding a place with a lower cost of living can include considering retirement in another country.

International Living

According to International Living, Panama is one of the best options for Americans looking for affordable living costs, good medical services, and an appealing climate. Costa Rica, Mexico, and Belize are also good possibilities.

Before you pack your sunhat and flip-flops and head for a low-cost retirement haven like Panama, however, take a look at all the factors affecting your retirement income and expenses. One of those is taxes.

Taxes

Moving out of the country does not mean your tax bill to the US government or your current state will decrease. Short of giving up your US passport, there is nothing you can do to escape paying US taxes on your income, even if you don’t live in the US. We are one of two countries worldwide—the other is Eritrea—that taxes our citizens based on both residence and citizenship.

You might assume, however, that moving out of the country would end your liability for state income taxes. That isn’t always the case. Some states still want to tax your income even though you don’t live there. According to Vincenzo Villamena in a December 2018 article for International Living magazine titled “How to Minimize Your State Tax Bill as an Expat,” it’s especially problematic if you end up returning to your old address in the state and start filing an income tax return. Eventually, he says, “the state will see the gap” and may require you to pay taxes on the missing years.

You have nothing to worry about if you live in one of the seven states with no income tax: South Dakota, Wyoming, Nevada, Washington, Texas, Florida, and Alaska. Tennessee and New Hampshire aren’t bad, either, as they don’t tax your earnings but they do tax your investment income. Most other states will let you off the hook if you submit evidence that your residence is in another country and you haven’t lived in the state for a while.

Then there are the states that won’t let go of their former residents easily. Those are California, Virginia, New Mexico, South Carolina, North Carolina, Massachusetts, and Maryland. Assuming that when you leave you will be coming back, they require that you continue to pay state tax on your income.

***

Solutions?

The solution to this issue takes a little financial planning and some extra time. The best way to escape paying taxes to a state you no longer live in is to move to a state with no income tax first before relocating abroad. You must prove to your old state that you have left and have no intention of ever coming back.

***

***

This means moving for real—cutting as many ties to your old state as possible and establishing as many as possible in your new state. You will want to sell your home, close bank accounts, cancel any mailing addresses, change healthcare providers and health insurance companies (including Medicare), be sure no dependents remain in the state, and register to vote and get a driver’s license in the new state. As a final good-bye you will want to notify the tax authorities that you are filing a final tax return for your last year that you lived in the state.

Assessment

In case you need a good state from which to launch your leap into expat status, consider South Dakota. Not only would my income tax-free home state let you go easily, it would welcome you back if you should decide to return to the US.

Your thoughts are appreciatedBook of Month

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

One Response

  1. On the Wealth Tax

    Democratic Presidential candidate and Massachusetts Senator Elizabeth Warren is proposing a federal wealth tax. It would impose annual taxes of 2% on those with household wealth—net worth, not income—of over $50 million and 3% on those with over $1 billion.

    While the US has never had a wealth tax, we do have a version of it in the form of real estate property taxes. These are commonly imposed by municipalities, counties, and states, with annual rates ranging up to 4% of a property’s value.

    Almost every person who owns a house, commercial building, or investment property pays property taxes in amounts similar to those proposed by Sen. Warren. How is a wealth tax much different?

    Primarily, it is simply not practical. Here are two reasons why.

    1. Asset Amnesia

    South Dakota once had a wealth tax of sorts, a personal property tax on the value of household goods, personal effects, home appliances, and sporting goods. I remember my father filling out the personal property tax form every year.

    Others old enough to remember this tax have told me about its amazing physiological impact. Completing the form resulted in severe short-term amnesia and brain fog. As extension economist Gordon D. Rose wrote in his December 1973 newsletter, “The temptationto ‘forget’ to list certain items of personal property is very great when one observes the behavior of his friends and neighbors.”

    Accordingly, the tax became known as “the liar’s tax.” South Dakota repealed it in 1979. Most other states have also moved away from taxing tangible personal property.

    A wealth tax would cause a nationwide epidemic of asset amnesia. One reason the property tax works so well is that real estate is a difficult, if not impossible, asset to hide. This isn’t true with other forms of wealth like diamonds, collectibles, jewelry,personal property, guns, cash, closely held businesses, and to a lesser degree bank savings, investment, and retirement accounts.

    2. Overwhelmingly Difficult Enforcement

    The essential reason a wealth tax is unrealistic is the impossible logistics of enforcing it. Evan Simonoff, editor of Financial Advisor, sums this up in a Feb 12, 2019 article “Why A Wealth Tax Has No Chance.” He cites national policy analyst Andy Friedman of The Washington Update, who spoke at the Investment & Wealth Institute’s annual Investment Advisor conference in New York City on February 12.

    According to Friedman, annual appraisals of all the assets of several thousand wealthy households are simply beyond the capability of the IRS’s manpower and infrastructure.

    There is “no chance of a wealth tax,” Friedman told attendees at the conference, pointing out that the IRS “couldn’t handle it.” He noted that people only have their entire wealth appraised once—when they die. Appraising a person’s real estate, collectables, and other illiquid assets once a year is gargantuan task that is simply unrealistic. It would overwhelm appraisers and the IRS.

    Adding enough skilled IRS staff to even attempt this task would make the cost of collecting the tax prohibitive. There is also a question as to the constitutionality of such a tax.

    While a wealth tax may sound appealing and make for good sound bites, it’s a pipe dream that’s more of a nightmare. It would be impossible to enforce. It would serve as a great motivator for the wealthy—along with many of their businesses and the jobs provided by them—to relocate to other more tax- and capital-friendly countries. It would never bring in the revenue politicians will expect. It would stagnate the economy. A tax on the wealth of US citizens would result in a decrease in the wealth of the nation.

    Rick Kahler CFP

    Like

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