A guide to financial planning for expats
Many Americans are uprooting themselves to explore the world and often taking their work with them.
But while living abroad has its benefits—including a lower cost of living, in many cases—it also introduces financial complications.
This guide to financial planning for expats covers what you need to do to both protect and enjoy your wealth while living abroad.
The Rise of the Expats
By definition, an expatriate (or expat) is someone who lives full time outside of their home country. You haven’t given up your citizenship and can return at any time. But you do most or all of your day-to-day living in a different country.
Becoming an expat is a growing trend, particularly among young people. Millennials, in particular, aren’t afraid to leave their home country in pursuit of opportunity or adventure.
Take a city like Barcelona, Spain, which is brimming with sangria, paella, beautiful beaches, and a culture unlike anything you can find stateside. You only need a laptop, cell phone, and a reliable internet connection to work from just about anywhere, even if it’s halfway around the world.
As glamorous as it sounds, success as an expat truly depends on proper financial planning. You’ll need to do your research to know your options and give yourself enough time to plan your return home the right way.
The Financial Implications of Living Abroad
One of the biggest draws of living abroad, even for a short period, is enjoying a lower cost of living. Countries like Vietnam, Mexico, and South Africa are ideal for stretching your income or savings farther than they would typically go if you lived in the United States. In some cases, you won’t only be making money; you’ll be able to save more, too!
Still, living in a country with a low cost of living comes with its own set of financial implications. You need a consistent way to make money and budget for financial obligations outside of your daily housing, food, and entertainment costs.
How to Earn Money as an Expat
How much money do you need to live as an expat? It helps to work backward.
Start by exploring the countries or cities in which you want to live. What does it cost to live there? Will you need to budget for transportation, or can you walk anywhere you need to go each day? Brainstorm to come up with a ballpark figure, then start exploring ways to come up with that much money each month.
Popular options among expats include dropshipping businesses, affiliate marketing, tutoring, freelance writing, and other jobs that don’t require client face time. In some cases, larger employers offer remote work opportunities that allow employees to maintain their current roles abroad.
One of the biggest draws of living abroad is enjoying a lower cost of living.
However, you can also get a traditional job that will further immerse you in the culture. Food and nanny services, tour operators, hospitality jobs, and cleaning or house-sitting can help you pay the bills and enjoy life in a new country.
If you go the traditional route, you may need to acquire a work visa or permit. You may need a job offer before you can be issued a work permit. Do this research before you leave your home country, so leave plenty of time for planning.
Paying Taxes in the U.S. and Abroad
As an expat, you must pay income and property taxes on your U.S. property, just as you would living in the U.S. full time. If your earnings exceed the filing threshold ($12,000 for single filers and $24,000 for married filing jointly), then you will need to submit a tax return.
Your earnings are your worldwide income—a combined total of income from U.S. and non-U.S. sources, interest, dividends, and rental income. If you’re self-employed, the threshold is $400, regardless of filing status. In addition, you may need to pay taxes in your new country of residence—often at a higher rate than in the U.S.—if you’re employed abroad.
However, there are a few silver linings worth mentioning.
First, expats get an automatic filing extension until June 15. You will still need to pay any taxes owed by April 15, but you won’t have to file until June.
Expats are also eligible for several deductions, credits, and exclusions:
- Foreign Tax Credit (Form 1116): Credits you for any taxes paid to the host country.
- Foreign Earned Income Exclusion (Form 2555) or FEIE: Excludes income up to $105,900 earned from non-U.S. sources to avoid being double-taxed.
- Foreign Housing Exclusion: Allows you to deduct the total amount you’ve paid for housing to reduce your taxable income. The form works in conjunction with the FEIE form.
- Employers can also make payroll adjustments to offset additional taxes levied in your new country of residence.
To qualify for FEIE, you must pass a residency test that proves you’re living in a foreign country for at least 330 days each year and have no immediate plans to move back to the U.S.
Foreign Account Reports
Besides your income tax report, you will also need to file a Foreign Bank Account Report (FBAR) with the U.S. Treasury. This is an easily overlooked item, but failure to file it may alert the IRS and can result in penalties ($10,000 or more per violation).
If your account balance exceeds $10,000 at any point in the year, you’ll have to file an FBAR. This is an aggregate figure, so don’t think you can get away with shuffling your money between multiple foreign accounts.
The FBAR is the federal government’s way to uncover offshore accounts to ensure you’re accurately reporting your finances. To be clear, you’re not taxed on your foreign account balance. Instead, this form is just a way of knowing how much you’re banking overseas.
Following a Savings Strategy
If you’ve chosen a country where your money goes further, don’t get too comfortable with the lower cost of living. You should still be stashing away money for retirement. And if your expenses abroad aren’t as high, you should be able to put away more than you could at home.
Keep in mind that if you’re contributing to an employee-sponsored 401(k) account, you may not be able to contribute as an expat if company policy prohibits it. You’ll need to check with your employer to ensure your eligibility.
If you contribute to a traditional or Roth IRA, you can continue to do so only if you have taxable income in the U.S. Foreign earned income and tax credits may wipe out your tax liability, which means you’ll need alternative ways to invest in your future.
What to Know About Living Expenses
Cost of living will vary, so you’ll want to do research on your chosen city or country before moving there.
Also, consider that your current health insurance may not follow you abroad. Review your policy details and determine whether you’ll need to get additional coverage. Though health care costs can be lower in some countries, you should still have a backup plan for emergencies. The same goes for other types of insurance: auto, life, renters insurance, and umbrella coverage.
Plan to use credit cards that reduce or eliminate foreign transaction fees.
The key to financial planning for expats is having a plan in place and sticking to it while abroad. Ideally, you’ll have at least six months of expenses that are liquid and accessible. After living abroad for a few months, you’ll have a better idea of what things cost and can adjust accordingly.
How to Handle Banking as an Expatriate
If you plan to keep your U.S. bank, inform them of your plans to live abroad. You can use your domestic account to pay for local expenses back home, such as a mortgage or property taxes.
Currency exchange rates are expensive, and using your current credit cards may incur foreign transaction fees. However, there are credit cards specifically designed for international travel that reduce or eliminate foreign transaction fees.
Also, don’t stock up too much on local currency before you get there. You often lose 5 percent or more in exchange fees, and while it’s good to have local money on hand, you don’t want to overdo it.
Debit cards and ATMs are usually the best way to get local currency. Many banks and credit unions offer debit cards that don’t incur ATM fees.
Take Stock of Your Investments
Before departing the United States, do an inventory of your investments and understand exactly where your assets are. Many people don’t realize how much their portfolio has grown over time, which often results in them underestimating how much time and effort they need to put into managing it.
Consider whether you’ll be able to handle your investment strategy abroad. If you know you’ll be too busy or don’t want the stress or hassle of maintaining and rebalancing your portfolio, consider partnering with a financial advisor to help you do the heavy lifting.
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