Living in another country can be an exotic adventure. That is, until it comes time to fuss with your finances. Figuring out what to do with your taxes, retirement plans, real estate and other monetary matters across multiple jurisdictions can be a confusing mess that, if mishandled, could result in serious financial missteps. Just ask Treasury Secretary Timothy Geithner (more on that later).
In some cases, common sense financial planning for traditional, U.S.-based clients can be the wrong advice for cross-border clients. For Americans moving to Canada, consider what could happen with living trusts, a common estate planning tool in the U.S. "These aren't flow-through entities in Canada like they are in the U.S.," says Brian Wruk, president of Transition Financial Advisors Group in Gilbert, Ariz., a firm that specializes in advising expats on both sides of the U.S.-Canadian border.
Wruk's advice: Unwind the trust before relocating north of the border because all undistributed income is taxed at the highest marginal tax rate, which, depending on the jurisdiction, can be as much as 48%.
For financial advisors, that's just one example of the vagaries and vicissitudes of planning for clients who live and work abroad. Planning for cross-border clients entails knowledge of the tax treaties and investment regulations of the country-or countries-where a person has financial interests such as earned income, property, a business or financial accounts.
"The [expat] landscape is laced with landmines that can blow up on you if you don't know what you're doing," says Frank Reilly, president of Reilly Financial Advisors LLC in La Mesa, Calif., a firm that advises expats in 11 countries and has an office in Saudi Arabia. "There are so many moving pieces when somebody moves overseas."
According to the IRS, as of 2006 roughly 7 million Americans filed tax returns outside the U.S. Lucrative pay is often a big incentive for taking an overseas gig. Missionaries or teachers in Africa, on the other hand, go abroad for other reasons. But no matter the pay, working overseas provides tax advantages thanks to the Foreign Earned Income Exclusion.
To be eligible, individuals need to be physically outside the U.S. for 330 days during a period of 12 consecutive months. In 2009, the first $91,400 earned overseas is tax-free for U.S. purposes. This applies to both employees and the self-employed, but they must file IRS Form 2555 to receive this benefit.
Sounds great, but expats still have to worry about taxes in the country where they live. They have to be careful about handling property they buy overseas. And they have to remember that Uncle Sam is always looking over their shoulder when it comes to worldwide income.
Kyra Morris, a certified financial planner in Mt. Pleasant, S.C., says that among her clients is a couple who recently moved back to the U.S. from Germany after living abroad for ten years. They bought a home there, kept it and turned it into a rental property.
"When I did their 2008 tax return, I noticed he didn't give me income information on their German rental property," Morris says.
"The guy said, 'What's in Germany should stay in Germany, and I shouldn't have to report that.' I said, 'That's not the way it works, and that we'll attempt to get a tax credit for any taxes paid in Germany.'"
IRS Form 1116 is used for claiming foreign tax credits for taxes paid in foreign countries. Nick Hodges, president of NCH Wealth Advisors in Fullerton, Calif., says a common mistake in this area is that many foreign fees and excise taxes don't qualify because they aren't considered foreign income taxes.