US citizens have different reasons for living abroad. Statistics suggest that close to 9 million Americans have relocated to countries across Europe, Australia, and neighboring Canada. Wonderful weather, retirement, launching a business overseas, or accepting a company post at an offshore location are only some of the reasons. For most people, their decision is impacted by economic factors. Before you make the decision to move, it is advisable to do your homework and find out about how relocating can affect your finances.
1. Renting Could be More Economical than Investing in a Home
When you first move to a new city, it is advisable to rent a home on a short-term basis until you learn about the best and most economical places and neighborhoods to live in. You’ll also want to scout around the US expat community and get information from expert real estate agents and colleagues.
Keep in mind that the US IRS expects to be notified that you intend to move. You’ll continue to file returns and pay taxes back home even if you’ve opted to live in your adopted country for a long term. Considering that any real estate you own incurs taxes on your US expat returns, check with an expat tax consultant and ask about how to factor in mortgage payments and capital gains.
2. Check for the Exempted Income for the Particular Fiscal Year
The IRS outlines a particular income level each year for US expats living abroad. Any income you earn from foreign sources can be deducted and the applicable income tax is payable on the amount over and above this limit. For instance, the income threshold for the year 2020 is fixed at $12,200. You’ll deduct this amount from your income and pay taxes on the balance.
The IRS has several other exemptions that you can claim. By taking advantage of laws like Foreign Housing Exclusion, Foreign Earned Income Exclusion, and Foreign Tax Credit, you can make substantial savings. Your tax consultant can also advise you on the Social Security and Medicare you must pay as a self-employed expat, and any tax-free pension or retirement plans that you can invest in for a secure future.
3. Budget Your Living Expenses Carefully
Just as you would back in the US, budget your living expenses carefully. If you can’t move to an expat community, consider joining message boards where you can get detailed information about how to buy economical groceries. You’ll also learn how to cut back on travel costs, food, and utilities. Ask about the best places to eat and cheap entertainment venues. US taxation laws allow you to deduct your living expenses from the taxable income so make sure to use this provision to keep costs down.
4. Saving While Working on Company Projects
Many expats accept a US company-assigned project in another country like, for example, a mergers and acquisition task. If you’re living and working for a US-based company, your employer will likely cover taxes by deducting them before paying your salary. In that case, inquire about the currency in which you’ll receive wages and how to calculate taxes after taking into account currency fluctuations. If you’re paying taxes in the host country, you could exclude these taxes from the returns you file with the US IRS. You’ll also take advantage of the provision for deducting your living expenses from the taxable income. If you’ve incurred any moving expenses that your company will not carry, check with the tax consultant about deducting them from the taxable income.
With a little research, you can identify several ways to cut back on your living expenses and take advantage of tax rebates available to US expats living abroad.