"More developed countries such as the U.K., Sweden and even Mexico tend to have higher income taxes than in the U.S.," Hodges says. "Less-developed countries tend not to have a strong income tax structure, so they tend to take their fees out in tariffs and other hidden types of fees. Africa, South America and Central America are famous for that."
On Your Toes
There are numerous complex reporting forms that need to be tracked by U.S. citizens or residents with foreign accounts, depending on a person's situation. For instance, there's Form 5471 that applies to U.S. residents who own more than 50% of a foreign corporation. Wruk says the fine for not filing the form is $10,000, and that the IRS is increasingly vigilant on non-compliance.
Social Security taxes is another area that can trip up U.S. expats. Timothy Geithner's confirmation hearings for the Treasury secretary post hit a snag when it became known he didn't pay Social Security taxes on earned income from his consulting work with the World Bank.
"When work overseas isn't connected to the U.S., there's no facility for them [the employer] to withhold Social Security taxes," Hodges says. "So that's one that people tend to miss."
Hodges notes that it's important to have a clear understanding of an expat's tax situation before making investment advice. "There are times when you'd make a recommendation to someone stateside that you wouldn't to an expat because they wouldn't have the same tax issues."
One example is when an expat makes less than the Foreign Earned Income Exclusion, which results in no U.S. tax hit and negates the advantages of boosting 401(k) or IRA contributions. "Those could be the wrong investment vehicles in that situation," Hodges says. "Rather than an IRA, in some cases they might be better off in some type of variable annuity product where they have basis."
Getting Up To Speed
Holly Hunter found out firsthand the difficulties in dealing with cross-border finances. The Portsmouth, N.H.-based certified financial planner owns a rental property and a working ranch in Mexico. She had to set up her working ranch as a corporation, which came with assorted administrative headaches such as complying with stringent local labor laws and opening up a bank account (a specific visa is required) and filing frequent reports on that account to the Mexican government.
"I was clueless when I bought the properties," Hunter says. "I was just looking at blue water and a beach. There's so much you don't think about until you're in the middle of it.
"I've learned through the school of hard knocks over the past four years," she adds. "I think more folks will be attracted to Mexico because living costs are lower there. It's a great opportunity for retirees."
To help clients who've moved to Mexico, Hunter taps into folks with in-depth knowledge of Mexico's financial workings. Among them is Raoul Rodriguez Walters, founder of Mexico Advisor, a firm specializing in providing financial services to expats living in Mexico.