Retiring Abroad and US Taxes
Choosing to retire abroad is a significant decision, involving careful thought and planning. One crucial area to consider is the US tax implications and understanding the filing requirements once you move. Contrary to popular belief, retiring abroad does not relieve you of US tax reporting obligations. You are required to report your worldwide income every year, even if you reside in another country.
Do you pay US taxes if you retire overseas?
US citizens are subject to federal taxes on their income, regardless of where they live, provided they meet the filing threshold. The filing thresholds for the 2022 tax year for those aged 65 or older are:
Head of household: $21,150
Qualifying widow(er): $27,300
Married filing jointly (one spouse is 65 or older): $27,300
Married filing jointly (both spouses are 65 or older): $28,700
Married filing separately: $5
US tax law does provide some relief for taxpayers living abroad, including the Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Housing Deduction. The foreign housing exclusion is generally available to those employed by an employer, while the foreign housing deduction applies to the self-employed. Use Form 2555 to calculate your foreign earned income exclusion and housing exclusion or deduction.
Do expats pay taxes on retirement?
Yes, as an American expat, retirement distributions, except for those from ROTH IRAs, are considered passive income and must be included in your US gross income. However, these distributions are not eligible for the Foreign Earned Income Exclusion.
Can you live outside the US and collect Social Security?
Yes, income from retirement pensions, 401(K)s, and Social Security benefits remain taxable in the US even when you live abroad. However, the US has tax treaties, or ‘totalization agreements’, with several countries, ensuring that American expats only pay Social Security tax to one country, depending on their duration of stay abroad.
Will I still have state tax filing requirements if I retire abroad?
Whether you will have state tax filing requirements once you’ve retired abroad depends primarily on your sources of income. Retirement income and Social Security benefits are typically exempt, meaning without any US rental properties, you’ll be completely exempt from state filing obligations. However, some states might require you to file even after retiring abroad, irrespective of your state taxable income.
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Capital Gain Tax(CGT) and Selling your property in Australia
In Australia, when you sell your primary residence, the Australian government doesn’t charge a capital gains tax. However, if you’re a U.S. citizen or Green Card holder selling your Australian home, the IRS may require you to pay capital gains tax. This comes into play if you’ve not lived in and owned the property for at least two of the previous five years. The tax exemption for joint filers is up to $500,000 profit and for single filers it’s up to $250,000.
When selling a property, the selling costs, which include real estate commissions, legal expenses, and costs related to the sale are deductible. The cost of property renovations, excluding labor, can be added to the cost basis (the original purchase cost) which helps calculate the real profit.
If you co-own the property with an Australian spouse, the profits and expenses are typically divided by two. Each half is considered for taxation separately, which may benefit you if your profits are between $250,000 and $500,000. However, adding your Australian spouse to the U.S. tax system has its complexities and risks, and professional advice is recommended.
Selling rental properties in Australia also attracts tax obligations. These properties are considered business assets and their sale is fully taxable. However, any tax paid in Australia can be used as a credit for U.S. taxes. If your Australian spouse is outside the U.S. tax system, it might be beneficial to put all non-U.S. assets in their name to avoid U.S. tax issues.
It’s also critical to keep good records of expenses and improvement costs to the property, as these can be deducted and save you tax.
Superannuation, or retirement savings, can be a tricky area for U.S. taxpayers in Australia. The IRS treats superannuation contributions as part of your income, which can lead to tax implications. Although there’s potential for complications, including superannuation as a wage income on your U.S. tax return can mitigate future taxation when you start drawing from the fund in retirement.
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Australian Retirement Fund
If you’re planning to retire in Australia, understanding the Australian Retirement Fund can be quite a task. This fund, often referred to as “Superannuation” or “Super,” is the country’s government-supported pension plan aimed at providing financial security post-retirement. Let’s delve into some details about the fund.
Anyone over 18 years old earning more than $450 before tax in a month is eligible to receive super contributions from their employer. Some exceptions are there though, like if you’re a contractor, earn less than $450 a month, or are a temporary resident in Australia for less than 6 months. The good news is that even expats and self-employed individuals can partake in this system, though their contributions may vary.
Monitoring your Super fund balance is crucial. You can keep track by consulting your superannuation fund provider, a financial advisor, or using online portals to check your balance, contributions, investment performance, and more. Also, connecting your MyGov account to the Australian Taxation Office (ATO) can help consolidate and view all your Super accounts.
Something important to remember is to nominate beneficiaries for your Super fund. This ensures your retirement savings are distributed as per your wishes in the unfortunate event of your death. This nomination can be updated anytime and should be reviewed regularly, especially after significant life events.
There are tax implications too, particularly for expats. The taxation of Super distribution depends on the individual’s residency status and the type of contributions they make. Generally, super contributions are taxed at a concessional rate of 15%. However, for withdrawals made before the preservation age, the applicable tax is levied. Expats might be subjected to tax in both Australia and their home country. Hence, consulting a tax professional is advisable.
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Understanding the Australian Superannuation Fund
Understanding income tax rules can be challenging for American expats, especially when it involves retirement plans like the Australian Superannuation Fund. So, here’s the breakdown.
In Australia, you’re eligible for the ‘super guarantee’, a compulsory payment made by your employer into your superannuation fund, similar to a 401(k) in the US. If you’re over 18, employers are required to pay 10.5% of your ordinary earnings into this fund. The Internal Revenue Service (IRS) usually considers this super guarantee as equivalent to Social Security and thus may not include it in your US tax return. However, voluntary contributions to your superannuation fund will be included in your gross wages.
A totalization agreement exists between the US and Australia to prevent taxpayers from contributing to two separate social security systems. This agreement specifically covers the Superannuation Guarantee made by employers. However, the US-Australia tax treaty does not cover superannuation. If your voluntary contributions exceed the compulsory contributions by your employer, the IRS may classify your super fund as a ‘Foreign Grantor Trust’, making all contributions taxable at the personal tax rate, nullifying any benefits from the Australian super system.
Moreover, if you’re an expat on a temporary visa and decide to permanently leave Australia, you can apply for your superannuation to be paid out as a departing Australia superannuation payment (DASP). If you fail to claim your DASP, your super money will be transferred to the Australian Tax Office as unclaimed super money, taxed up to 65% of the withdrawn value.
The IRS does not provide clear guidance on how superannuation income should be taxed on your US tax return, and it can either be treated as a grantor trust or an employee benefits trust. If it’s considered an employee benefits trust, both employer and employee contributions are taxable. If it’s viewed as a foreign grantor trust, all contributions and growth income will be taxed.
The key determining factor for the type of trust is control. If you’ve made more contributions than your employer, your fund is likely considered a foreign grantor trust. However, without definite IRS guidelines, the classification isn’t always clear. Therefore, getting specialist tax advice is recommended to avoid confusion or double taxation, particularly if you have a self-managed superannuation fund.
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