Wednesday, July 29, 2009

7 Life-Changing Financial Decisions U.S. Expats Must Consider to Protect Their Assets and Investments

The many moving parts of an U.S. Expatriate’s financial world must be brought together under one qualified tax and financial advisor. So much more hinges upon the proper application of the additional tax regulations associated with earning income abroad. However, relying on just a tax professional to manage all the moving parts, excludes other critical investment, pension, legal and insurance arenas that need to be taken under consideration. Pulling all these areas together in a do-it-yourself fashion can lead to many costly mistakes. Working together with an experienced financial advocate can help you properly implement the many advantages of living and working overseas.

1. Taxes

It’s important to understand that U.S. Expats are always taxed on world-wide income. Non-U.S. residents may be entitled to certain tax advantages. These advantages fall into three general categories: Foreign Earned Income Exclusion, Foreign Housing Exclusion/Deduction, and Credits for Foreign Income Taxes Paid.

Foreign Earned Income Exclusion. Most U.S. Expats qualify for the Foreign Earned Income Exclusion by meeting the ‘physical presence test’. You are eligible for the Foreign Earned Income Exclusion if you are physically present in a foreign country (or countries) for 330 full days during a period of 12 consecutive months. The Foreign Earned Income Exclusion is not automatic -- you must file a U.S. Income Tax Return (IRS Form 2555) in order to receive it. This exclusion can be used by employees and the self-employed as long as they meet the criteria. IRS Report for 2006 shows that approximately 50% of all foreign earned income fell into this category.

Foreign Housing Exclusion/Deduction. Foreign Housing Deduction criteria apply only to the self-employed. For the purposes of this article, we are focused on the Foreign Housing Exclusion provided to employees. Your housing exclusion is the total of your housing expenses for the year, less the base housing amount. The calculation of your base housing amount is dependent upon your Foreign Earned Income Exclusion. The limit is generally 30% of the maximum Foreign Earned Income Exclusion; however, the limit will vary depending upon the location of your foreign tax home. To maximize your Foreign Housing Exclusion, you need to make sure that your Foreign Earned Income Exclusion is correctly calculated.

Credits for Foreign Income Taxes Paid. IRS Form 1116 is used to claim the Foreign Tax Credit. The amount you can claim is the amount of legal and actual tax liability you pay during the year. The mistake that is most often made here is that many foreign fees and excise taxes are not considered foreign income taxes and therefore do not qualify.

See IRS Publication 54 for more details. Please understand that these kinds of computations are beyond the working knowledge of most stateside tax professionals. As you settle into your overseas assignment, make sure you work with a tax professional knowledgeable in expatriate tax.

2. Your Pension

While there may be certain income tax advantages to U.S. Expatriates, one thing that should be very clear is that there is no exclusion for U.S. Social Security taxes. This is the famous mistake made by U.S. Treasury Secretary, Timothy Geithner. In a nutshell, Mr. Geithner earned consulting income from the World Bank, and while he reported the income and took the Foreign Income Exclusion, he neglected to pay the Social Security taxes on this earned income. An error like this is completely avoidable when working with a qualified tax professional.

In addition to Social Security, U.S. Expats have available to them the same employer pension programs and retirement options that they would have stateside. While these options might be available, they might not have the same tax impact because of the Foreign Income Tax Exclusion. It’s important to have a clear understanding of your tax position before making employee contributions while living abroad.

Of special note, in 2010, Roth IRA contributions will be allowed for all U.S. taxpayers with earned income. In the past, most U.S. Expats have been excluded from this opportunity because their income levels are above the limits for this program. This is a one-year only opportunity to contribute to a Roth IRA. Everyone should be discussing with their financial advisor the best way to participate in this opportunity next year.

3. Offshore Bank Accounts

It’s quite appropriate for U.S. Expats to open up bank accounts overseas. Many may wish to have accounts in U.S. dollars as well as in foreign currencies. Two important considerations need to be made when opening up bank accounts overseas: all earnings from these accounts are reportable and taxable on your U.S. Income Tax Return and a separate filing to the U.S. Treasury must be made by June 30th of each year. (Treasury Form TD.90-22.1)

4. Investments

Since there is no tax advantage for earning interest and dividends overseas, most U.S. Expats keep the bulk of their investments stateside. It is not unusual, however, for U.S. Expats to own rental real estate or have other business interests abroad. While this is a very complex topic, generally rents from real estate operations and earnings from foreign businesses with no operational ties to the U.S. can defer taxes on profits until the money is brought back into the United States. This issue is currently under significant scrutiny by the Obama administration, with the expectation of significant revisions to be made.

5. Insurance Protection

Most Expat employees have life and health insurance through their employers. If you are self-employed, or a contract-employee that does not have these benefits, then you will want to make sure you have proper life, health and disability coverage before you leave the states. The most critical of the three tends to be health insurance coverage. I strongly recommend buying an international health insurance policy that allows you the option to use local (foreign) hospitals or return to the U.S. for treatment. Some policy features will also cover your return home. The cost of these policies can be very reasonable, and sometimes substantially less than health coverage at home.

The amount of coverage needed for Life and Disability policies vary substantially from family to family. I recommend a thorough review of your unique situation with a qualified financial advisor that can calculate for you the best coverage for your family.

6. Estate Planning

Over the years, I’ve worked with dozens of estate planning attorneys throughout the United States. The one thing that has been abundantly clear to me is that American expatriates should have a living trust in place to manage their estate issues. A living trust assists in managing monetary issues as well custodianships for minor children and any other issues and assets that need to be administrated. It is customary for individual wills and medical powers of attorney to be executed when a living trust is established. It’s critical for an American Expat to have all of these legal documents in place before living and working abroad.

7. Returning Home

There is nothing special that Expats need to do when returning home except to make sure that they have spent 330 days of the past consecutive 12 months overseas. Spending time abroad usually requires significant financial organization while you’re away. When you return home, continue to work with a qualified professional you can trust to handle your tax and financial issues over a lifetime. It is likely that you will return to an overseas assignment, so when you do, make sure you have that financial advocate in place.

Build a relationship with a qualified financial advocate that can be with you and your family for the next twenty years, guiding you through the complexities of your overseas or stateside employments. Work with someone you can trust to know you and your family’s unique needs, one that will bring your financial world together in a way that makes managing it simple and sensible, no matter where you may live.

These kinds of conversations are all part of our overall services to our clients at NCH Wealth Advisors. Please contact our office if you have any questions: 714-459-7020. We are happy to help provide the direction you need.Please feel free to pass this along to anyone you think might benefit from this information. We appreciate all referrals.


All Securities through Money Concepts Capital Corp. Member FINRA/SIPC 11440 N Jog Rd., Palm Beach Gardens, FL 33418 Tel: (561) 472-2000NCH Wealth Advisors and Money Concepts are not affiliated.


Nick Hodges, President of NCH Wealth Advisors, provides US expatriates with the best tools, strategies and planning techniques to help expats manage their tax and financial goals and dreams on a day-to-day basis regardless of their location. To claim your free gift, ExPat Life Portfolio Kit, visit his site at

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