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9 January 2018

Retirees Are Fleeing the Country. Are You Next?

Retirees Are Fleeing the Country. Are You Next?
Escalating health insurance costs, property taxes and other expenses caused Career Pivot Founder Marc Miller and his wife to consider something completely outside their comfort zone: a move to Ajijic, Mexico. After reading the book Necessary Endings by Dr. Henry Cloud

, the consideration became a shockingly practical one for Marc.

“As I ran the numbers on our expenses, I began wondering why we were still in Austin,” he told us. “We own our condo free and clear, and it still costs us $1,200 to $1,500 per month. It became obvious that leaving Austin was a smart option. As we explored moving abroad, it made incredible financial sense.”

Mexico is among the top countries where Americans are retiring abroad in record numbers (third only to Panama and Ecuador). The Millers are too young to receive Medicare and plan to remain self-employed, but they hope their move to a strong expat-community will help them eventually transition into retirement happier, healthier and more financially secure.

Important Considerations

Marc offers details about the considerations he made going into his decision to give Mexico a try on his blog and through his podcast. The U.S. Department of State also provides a simple planning checklist for those considering retiring abroad.

If you plan to earn an income while abroad—either by working, renting your property, or by other means—understand that the IRS is going to follow you to your destination. While living abroad can help save property taxes and other living and medical expenses, it may not save you income taxes if you remain a U.S. citizen. That’s because the current U.S. income tax system is citizen-based. In fact, the U.S. is among only two countries in the world that taxes income based on citizenship instead of residency. (In case you’re wondering: The other country is Eritrea, a tiny, African country with an abysmal human rights record.)

With all other countries taxing income on a residency basis, you guessed it: You may need to pay double the income tax if you take up residency abroad but keep your U.S. citizenship. Certain ways around this catch include the Foreign Earned Income Exclusion, but you’ll need to time your travel and other plans precisely.

The other option is to renounce your U.S. citizenship, which a record number of Americans are doing. CNBC reports that 5,411 individuals either gave up their citizenship or terminated long-term residency in 2016—a 26 percent increase from the year before. However, the IRS takes a cut there, too. You can expect thousands of dollars in administration fees accompanying an even greater expatriation tax or “exit tax” for high net-worth and other individuals renouncing their citizenships for tax purposes.

If chasing your retirement dreams to a foreign land sounds like a great idea: It might be. Just plan carefully in advance to mitigate financial surprises along the way. For more information on how your taxes could be affected by such a move, contact us.

Image Copyright: anyaberkut / 123RF Stock Photo

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