# General thinking/feeling about losing sizable tax breaks when leaving U.S.



## Tortuga Torta (Jan 23, 2016)

(I'm not yet actually an expat anywhere; thinking in terms of Spain or Portugal, but open to other countries, though wife is from Spain)

My financial savvy is a serious "work in progress". I've only recently begun to understand some of the ways to save on future taxes as a U.S. person living in the U.S. Two big ones are Roth IRA distributions (tax free) and long term capital gains tax (not tax free, but with a generous--for many people--exemption, before which you pay $0 taxes). 

These mechanisms are really useful for people in a somewhat leaner retire-early model, because when you are cutting it a little close in terms of yearly affordability and market risk, thousands a year in taxes makes a difference.

However, it's quickly becoming clear that these benefits vanish when you become a tax resident of many other countries. Once you do, your worldwide income is included as taxable, and these same exemptions usually don't apply. 

The tax treaties do not seem to matter in this regard. They seem to be set up merely to prevent double taxation, not to enforce one country's tax model in the other one.

I can see two sides to it. One the one hand, the principal/basis of the money that I am talking about was acquired entirely in the U.S., through U.S. jobs or U.S. market returns, following U.S. laws, and paying U.S. taxes the whole time. That principal is generating the yearly returns through a U.S. stock market. In those regards, it seems that money should be taxable (or exempt from taxation, if the U.S. law decrees that) _only _within the U.S.

On the other hand, the American expat is living in the other country, using their roads and civic infrastructure. They are _not_ invested in that country's stock market, so are not helping that country's economy. All the expat is doing is taking and giving little back other than consumer spending and maybe "brand advocacy" for the country by telling friends back home how awesome it is to visit or live in. So I can see why the country may want the resident to pay taxes on all worldwide income.

How have you thought about your decisions in this context? 

I'm now thinking I may try hard to avoid becoming a tax resident in such a country, because the hit to our yearly financial planning may be too high a cost. But it's also a huge hassle for me to have to make sure I get out of the country before 183 days. There are also wildcards, such as if my European wife's family members get sick or need long term care and she stays there longer term--at that point, we are both considered tax residents, since a "center of vital interest"--my wife--would be there. That's actually very likely to happen.

Maybe the hassle factor is overstated. Maybe flying to Spain and staying for 5 or so months a year each year wouldn't be such a bad thing. But it does probably get harder as one gets older. Hard to imagine doing that in our 70s.

One of the possible benefits of expat-hood for me was that I hate the American health "insurance" system (I put it in quotes because it's not really insurance anymore when pre-existing condition barring was eliminated, though I'm glad about that). I hate it not only because it can be costly unless you're lucky and know what you're doing, but because there is always the possibility for enormous hassle/headache/heartbreak--particularly at times when one's loved one is gravely ill. I saw that in my own family and it's sickening. I much prefer the European model, but wonder if is is enough to compensate for this additional tax burden.

Your thoughts?


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## baldilocks (Mar 7, 2010)

Tortuga Torta said:


> (I'm not yet actually an expat anywhere; thinking in terms of Spain or Portugal, but open to other countries, though wife is from Spain)
> 
> My financial savvy is a serious "work in progress". I've only recently begun to understand some of the ways to save on future taxes as a U.S. person living in the U.S. Two big ones are Roth IRA distributions (tax free) and long term capital gains tax (not tax free, but with a generous--for many people--exemption, before which you pay $0 taxes).
> 
> ...


You are over-worrying. Taxes due in one country can be offset by those in another country if there is a tax agreement between the two countries, so put your mind at rest on that score. The other non-taxable benefits of living here and not in the US are incalculable.


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## Bevdeforges (Nov 16, 2007)

As Baldi says, you're worrying for nothing (or close to it). There are a variety of conditions in the tax treaties so it will depend to a large extent on where you wind up and what that country's tax treaty is with the US.

Basically, the only tax breaks you lose out on are the tax breaks accorded you by your country of residence. Unfortunately, taking advantage of a "foreign" retirement savings or "assurance vie" plan based outside the US can add all sorts of levels of complications to your US tax returns. OTOH, there is always renunciation, which frees you of the burden of US taxation (except for US source income). 

Where I live (France), US SS, IRAs, 401Ks and the like are taxable only by the US. OTOH, there are countries (like the UK, Germany and a few others) where the US does not have the right to tax you on US retirement benefits like those and only your country of residence taxes you. 

Of course you also have to factor in just how likely it is that the IRS will bother to enforce the tax laws on you once you are resident outside the US.
Cheers,
Bev


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## Tortuga Torta (Jan 23, 2016)

Bevdeforges said:


> As Baldi says, you're worrying for nothing (or close to it). There are a variety of conditions in the tax treaties so it will depend to a large extent on where you wind up and what that country's tax treaty is with the US.
> 
> Basically, the only tax breaks you lose out on are the tax breaks accorded you by your country of residence.


Well, if my country of residence were Spain, since Spain taxes all worldwide income like long term capital gains and Roth IRAs at the rates they do (bearing in mind the tax rate I would pay in the U.S. would be 0%), I would not losing out on tax breaks accorded to me by _Spain_, but those accorded to me by the _U.S._. That's my whole point. Can you explain how it would be otherwise? Or by "country of residence" do you mean "country of origin"?



> Where I live (France), US SS, IRAs, 401Ks and the like are taxable only by the US. OTOH, there are countries (like the UK, Germany and a few others) where the US does not have the right to tax you on US retirement benefits like those and only your country of residence taxes you.


My problem is I can't even figure out what Spain's policy is on this. On this site I've found two threads where people state that they have gone to a handful of accountants in Spain and they all give conflicting answers! For example:

https://www.expatforum.com/expats/s...in/664298-401k-withdrawals-taxable-spain.html



> Of course you also have to factor in just how likely it is that the IRS will bother to enforce the tax laws on you once you are resident outside the US.


I really don't care if the U.S. enforces their tax laws on me, because the income I am talking about is tax free to me. The U.S.'s laws greatly benefit me in this particular case. The problem is that Spain's income tax model is far worse.


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## Tortuga Torta (Jan 23, 2016)

baldilocks said:


> You are over-worrying. Taxes due in one country can be offset by those in another country if there is a tax agreement between the two countries, so put your mind at rest on that score.


I'm just not clear on the math of this at this point. By living with a fairly low annual spend, and drawing Roth distributions (tax free when you get them) or long term capital gains draws (tax free up to a certain amount), we'd be paying no federal taxes in the U.S. We would be paying them in Spain. Even if that generated a sizable tax credit to later be used in the U.S., what would we need it for if we're not paying taxes in the U.S.? That's my issue. 

There may be circumstances where we do have to pay sizable federal taxes again in the U.S. _if_ we move back here eventually from Spain. But if we don't move back to the U.S. (I was kind of thinking the warmer climate and better healthcare system might be more suitable for us in our oldest years), those tax credits are wasted. 

Or maybe I'm not understanding something?



> The other non-taxable benefits of living here and not in the US are incalculable.


Other than the obvious one of a more sensible healthcare system financially speaking (although the wait times are depressing...my wife just said my father will get blood test results taken today back in _December??_), that really remains to be seen for me. I'm willing to give it a try, but I just didn't see this added tax cost coming until last week. Thanks.


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## Bevdeforges (Nov 16, 2007)

Unfortunately that's the big disadvantage of being a US citizen and subject to US taxes your whole life long. The US is the only country (well, other than Eritrea) that taxes based on citizenship and not on residence and that's where the real issue lies.

FWIW, those of us with "tax free" savings in our countries of residence have somewhat the same issue in the other direction - although tax free in our country of residence, the US expects us to pay taxes on the interest. The option, I suppose, is simply not to report that income. And I suppose there may be those in Spain who characterize their Roth IRAs as "savings accounts" and treat them for Spanish tax purposes as withdrawals from a foreign savings account - possibly paying tax only on the current interest income. (That's the option I'd look into in your situation.)

The other option is to claim the tax credit on your US returns and roll it over as long as you can (I think the limit is currently 10 years) so that you could potentially use the accumulated credit if you were to return to the US at some point.
Cheers,
Bev


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## Tortuga Torta (Jan 23, 2016)

Bevdeforges said:


> Unfortunately that's the big disadvantage of being a US citizen and subject to US taxes your whole life long. The US is the only country (well, other than Eritrea) that taxes based on citizenship and not on residence and that's where the real issue lies.
> 
> FWIW, those of us with "tax free" savings in our countries of residence have somewhat the same issue in the other direction - although tax free in our country of residence, the US expects us to pay taxes on the interest. The option, I suppose, is simply not to report that income. And I suppose there may be those in Spain who characterize their Roth IRAs as "savings accounts" and treat them for Spanish tax purposes as withdrawals from a foreign savings account - possibly paying tax only on the current interest income. (That's the option I'd look into in your situation.)
> 
> ...


Thanks for your thoughts, Bev. In addition to what you've mentioned, because you were so clear about the status of 401k, etc. in France, I'm left wondering if France (and French government administrators and accountants generally) has their tax policy much clearer than Spain & Co. does. Quite a broad generalization, but I think my Spanish wife would be the first to say that despite a lot of things the Spanish do excellently, clarity and efficiency of bureaucracy might not be their strongest point. 

Oh and I always enjoy that donkey in your photo!


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## Bevdeforges (Nov 16, 2007)

I've had occasion to look at several of the tax treaties between the US and some of the European countries. They each have there own "peculiarities" and I have to believe that they were negotiated in good faith and in the attempt to "guard" certain tax rights or privileges of each of the parties to the treaty. 

So far as I can tell, the French treaty is the only one that seems to specify the various US "deferred tax" retirement savings plans as "government pensions" subject to the same treatment as US SS. Whereas both the UK and Germany tax US Social Security for residents rather than leaving taxation to the US as the source country. It's an odd mish mash of terms and conditions, all of which have their various origins in local tax laws and policies, I assume. 

Glad to hear you enjoy my donkey picture. At least I can say that the US can't tax "my ass" (either one of them, we've got two). They're both French nationals and not subject to US taxation. <g>
Cheers,
Bev


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## Tortuga Torta (Jan 23, 2016)

Bevdeforges said:


> Glad to hear you enjoy my donkey picture. At least I can say that the US can't tax "my ass" (either one of them, we've got two). They're both French nationals and not subject to US taxation. <g>


Too cute! I picture them drinking good wine and wearing berets. :tongue1:


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## dancebert (Jun 4, 2015)

baldilocks said:


> You are over-worrying. Taxes due in one country can be offset by those in another country if there is a tax agreement between the two countries, so put your mind at rest on that score. The other non-taxable benefits of living here and not in the US are incalculable.


Offset - a force or influence that makes an opposing force ineffective *or less effective*. Yes, double taxation treaties offset the total taxes owed. For example consider US 5k taxes, Country of Residence 15k. No treaty 20k taxes. Treaty 15k taxes.

Over-worrying? 15k-5k = 10k. For most folks, that's something to deal with, not worry about.


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## Bevdeforges (Nov 16, 2007)

For most folks, it's the country of residence taxes that matter - those are the ones you'd have to pay in any event. What hurts is the lifelong taxation that comes with that US nationality.
Cheers,
Bev


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## Exp76 (May 24, 2014)

A related question, I understand that for France and most EU countries 30% of Social Security payments and IRA withdrawals are withheld. Is that a "withholding" or is it an an out and tax penalty. I.E do you get any of it back by filing a 1040NR?


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## Bevdeforges (Nov 16, 2007)

Exp76 said:


> A related question, I understand that for France and most EU countries 30% of Social Security payments and IRA withdrawals are withheld. Is that a "withholding" or is it an an out and tax penalty. I.E do you get any of it back by filing a 1040NR?


It's not actually a "penalty" - just the tax rate for non-resident taxpayers. On Social Security payments, I think they withhold the 30% on 85% of the benefit, not on the whole amount. That is supposed to take into account whatever basic deductions you might be entitled to. However, depending on the tax treaty, US SS may or may not be subject to tax in the US - I know both the UK and Germany tax US social security (and thus a NR taxpayer will receive it without the withholding being taken). In Italy, you pay tax on US SS to Italy, but you must be both a resident of Italy AND an Italian citizen for that to apply. 
Cheers,
Bev


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## Exp76 (May 24, 2014)

Bevdeforges said:


> It's not actually a "penalty" - just the tax rate for non-resident taxpayers. On Social Security payments, I think they withhold the 30% on 85% of the benefit, not on the whole amount. That is supposed to take into account whatever basic deductions you might be entitled to. However, depending on the tax treaty, US SS may or may not be subject to tax in the US - I know both the UK and Germany tax US social security (and thus a NR taxpayer will receive it without the withholding being taken). In Italy, you pay tax on US SS to Italy, but you must be both a resident of Italy AND an Italian citizen for that to apply.
> Cheers,
> Bev


I knew about the 30% of 85% and that it didn't apply to certain countries. So I guess the answer is that the government keeps the money and there's no point filing a 1040NR if the sole source of US income is Social Security. Interesting in that this makes it more advantageous to move back to the UK instead of France !


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## Bevdeforges (Nov 16, 2007)

Exp76 said:


> I knew about the 30% of 85% and that it didn't apply to certain countries. So I guess the answer is that the government keeps the money and there's no point filing a 1040NR if the sole source of US income is Social Security. Interesting in that this makes it more advantageous to move back to the UK instead of France !


I looked into this a while back (when my husband started receiving his "spouse benefit" based on my SS benefits), and it looks like the only reason an NRA would file an NR return would be if they had certain types of income (primarily "business income") from the US on which they owed taxes. It says that somewhere in the instructions for form 1040NR.

But yes, I have a friend in Germany who just renounced and it doesn't affect her US SS benefit at all because of the tax treaty they have with the US. Such is not the case for me here in France, so I'm hanging onto my US nationality.
Cheers,
Bev


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## Exp76 (May 24, 2014)

Bevdeforges said:


> I looked into this a while back (when my husband started receiving his "spouse benefit" based on my SS benefits), and it looks like the only reason an NRA would file an NR return would be if they had certain types of income (primarily "business income") from the US on which they owed taxes. It says that somewhere in the instructions for form 1040NR.
> 
> But yes, I have a friend in Germany who just renounced and it doesn't affect her US SS benefit at all because of the tax treaty they have with the US. Such is not the case for me here in France, so I'm hanging onto my US nationality.
> Cheers,
> Bev


Thanks for the clarification.

I have UK nationality and I've been weighing the pros and cons of moving back to the UK or France for a while, this definitely favors the UK option. Still France will only be a short trip away. 

Do you know if this policy also applies to IRA withdrawals ?


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## Bevdeforges (Nov 16, 2007)

Exp76 said:


> Do you know if this policy also applies to IRA withdrawals ?


You would have to take a look at the US-UK tax treaty and what it has to say about Pensions. (Usually somewhere around "Article 18" though it varies by treaty.) 

As far as I can tell, the US-France treaty is the only one that lists out most of the government sanctioned "deferred taxation" plans (IRA, 401K and similar) as being considered to be "US government pensions" and thus treated like US SS. It wouldn't be a terribly great leap of faith to assume that these plans are "US government pensions" but France does seem to have the advantage of spelling out the specifics in the tax treaty. 
Cheers,
Bev


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## Exp76 (May 24, 2014)

Bevdeforges said:


> You would have to take a look at the US-UK tax treaty and what it has to say about Pensions. (Usually somewhere around "Article 18" though it varies by treaty.)
> 
> As far as I can tell, the US-France treaty is the only one that lists out most of the government sanctioned "deferred taxation" plans (IRA, 401K and similar) as being considered to be "US government pensions" and thus treated like US SS. It wouldn't be a terribly great leap of faith to assume that these plans are "US government pensions" but France does seem to have the advantage of spelling out the specifics in the tax treaty.
> Cheers,
> Bev


This sheds a bit more light on IRA questions and may be of help to others. I hope that there's not a problem with posting the link.

https://hodgen.com/ira-distributions-for-noncovered-expatriates/#fnref9


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## Bevdeforges (Nov 16, 2007)

Exp76 said:


> This sheds a bit more light on IRA questions and may be of help to others. I hope that there's not a problem with posting the link.
> 
> https://hodgen.com/ira-distributions-for-noncovered-expatriates/#fnref9


One (big) caveat on this citation is that it seems to assume that "all" tax treaties give the right to tax IRA and other pension benefits to the country of residence. That's not always the case - in France, it's the source country that taxes government pensions (like an IRA), so for a NR taxpayer that's 30% off the top. (It's one big factor that makes renunciation of US citizenship much less attractive for those of us drawing US retirement benefits here.)

In fact, when it comes to US Social Security, there are only a limited number of countries where those are taxable in the country of residence. See IRS publication 915 for details on that. And if you take the position that IRAs and the like are US government sanctioned pensions and thus taxable in the same manner as US SS benefits, it kind of contradicts the citation altogether. 
Cheers,
Bev


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