Learn about expat taxes for Americans and Canadians living abroad. Post is by 2 tax professionals, a CPA and an MBA in International Taxation. Plus, we share our experience while living abroad.
US Taxes For Expats: 3 Things to Know Before Retiring Abroad
Planning your retirement abroad? Here's what you need to know about US taxes for expats living abroad. This section is by Ines Zemelman with Taxes for Expats. Full bio.
US Taxes for Expats: What You Need to Consider
You’ve done the hard part – spent the last 30 years of your life working. Now you can enjoy your retirement, and Ecuador is an amazing place to do that.
However, although you are no longer going into an office every day, when deciding to retire abroad, you can’t lay your eyes of the ball and forget about taxation.
Taxes For Expats has put together a comprehensive retirement tax guide. They’ve also compiled a condensed version specifically for retirees in Ecuador – let’s look at some key tax factors to consider when planning to retire abroad.
3 Things to Know Before Retiring Abroad
1. Will My U.S. Pension & IRA withdrawals be taxed?
Distributions from a U.S. employer pension and from Traditional IRA’s will remain fully taxable by the IRS in Ecuador (or anywhere else, for that matter).
The good news – pension distributions will be exempt from U.S. state taxation. If you received those distributions while living in the US, then the state tax rate would depend on the tax rules of the state where you live upon retirement, not by the state where you earned it.
Distributions from ROTH IRA will remain non-taxable by the IRS and by your new country of residency. ROTH IRA was funded with after-tax money and therefore will never be taxed again.
2. Will I have to pay tax on my Social Security benefits?
Rules for taxation of U.S. Social Security benefits are different depending on your country of residence.
Unfortunately, Ecuador is not one of the lucky 8 and your social security benefits will be taxable (if your other income, ie dividends/interest, is above certain thresholds, see below)
Beneficiaries of the U.S. Social Security benefits residing in the following countries are exempt from U.S. tax on their Social Security benefits.
- Italy (You must also be a citizen of Italy for the exemption to apply)
- United Kingdom
If you live in any country not on this list, your U.S. Social Security will be taxable based on the same rules that if would be taxable in the U.S.
“You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.” Source: ssa.gov
If you are a green card holder check the conditions for receiving your Social Security benefit checks.
3. Do I have to buy a US healthcare plan to avoid the ACA penalty?
If you live in Ecuador, you won’t have to buy US healthcare insurance, and you will be exempt from ACA penalties. If you move abroad and plan to stay there for an extended period, you may qualify for the Bona Fide residence status in your new country of residence.
As a Bona Fide resident of a foreign country you qualify for exemption from mandatory Healthcare coverage in the U.S.
If you already reached the Medicare age and earned Medicare benefits in the U.S., you do not have to worry about the health care exemption and may stay in the U.S. or abroad for as long as you wish with no risk of ACA penalty. However, you will not have Medicare coverage while living abroad.
If you are below Medicare age, the following may apply. If you spend part of the year abroad and part of the year in the U.S., you qualify for an exemption only for the months that you lived abroad and only if you meet the Physical Presence test. You do not need to file form 2555 to claim foreign earned income exclusion.
And there you have it: answers to three common questions about US taxes for expats in Ecuador.
Ines Zemelman, EA is the founder and president of Taxes For Expats, an international tax firm. With over 25 years experience, Ines leads a team of experts to help navigate U.S. tax issues for clients in 175 countries.
Do I Have to Pay US Taxes as an Expat?
In this section, you'll learn about your tax obligations as a U.S. expat. This post is by Olivier Wagner, a Certified Public Accountant, U.S. immigrant and expat. See full bio at end of the section.
So you moved abroad. And then it hits you: “Do I have to pay U.S. taxes as an expat?”
Do I Have to Pay US Taxes as an Expat?
Just because you’ve physically left the United States doesn’t mean you’ve broken up with the IRS! America is one of only two countries in the world that keeps taxing their citizens no matter where they live or work.
The already complex process of filing your taxes gets even worse when you aren’t physically present. This leads quite a few people to wonder if they should even bother filing at all. After all, what’s the worst thing that could happen if you aren’t on your own soil? Right?
Many American expats have always been non-compliant with their taxes. They have spent their whole adult lives outside the U.S. Others figure that since they won’t be within U.S. borders, it would be impossible or impractical for the government to take any collection measures.
Citizenship-based taxation dates back to the civil war, and in many cases such assumptions were correct. At the time, the IRS had little enforcement power outside the U.S. But as FATCA is now a reality, and all your personal information is digitized, this assumption is becoming less and less valid.
Furthermore, the greater a person’s income, assets, or foreign activities (such as having foreign corporations or foreign bank accounts), the more likely a person is to be noticed and the more they will have to lose.
Both foreign corporations and foreign bank accounts come with filing requirements and potentially severe penalties for not meeting them.
You’ll learn all about these in the coming chapters. Before you decide to take this route, it’s a good idea to fully understand the consequences you might encounter if you fail to file for long enough to get caught.
The first thing to understand is that anything you owe the U.S. that you don’t pay while living overseas is subject to 3.25% interest. Though imprisonment is unlikely, you could face growing fines. Nonpayment of taxes can hurt both your finances and travel plans.
Getting Caught Up With Your US Taxes
How do expatriates become compliant with the U.S. tax system? The 1040 isn’t the only form you need to file. Many activities that seem benign can trigger specific filing requirements, and you may have to file other forms as well.
Read a book by the author: U.S. Taxes for Worldly Americans
The rules are the same for Americans living in the US, but Americans living abroad are much more likely to have participated in these “foreign” activities. They can bring about hefty fines (up to $10,000) if they’re not turned in on time.
Depending on your situation, you may also need to know about Form 5471, Form 3520, and Form 8621.
- Form 5471 must be filed if you own more than 50% of the stock of a foreign corporation (or in some cases just 10%). Constructive ownership rules apply. So, for reporting purposes, you could be considered to be owning shares which are actually owned by a related party such as a spouse or a corporation you also own.
- Form 3520 is pertinent if you are the grantor or “substantial owner” of a foreign trust. While the word “trust” brings up the idea of wealthy families, the U.S. tax rules see products such as the Canadian RESP (similar to a U.S. 529 plan) or foreign retirement plans (similar to a 401(k)) as foreign trusts.
- Form 8621 is for people who own stock in a Passive Foreign Investment Company (PFIC). In many cases, foreign mutual funds would also be classified as PFIC.
My Tax Advice for US Expats
My advice to everyone who does not already file is simple: you have a lot more to lose by not filing than by getting caught up with your taxes.
You may not have to face the consequences of it today or tomorrow, but the longer you go without paying your legal dues, the more likely it is that it will eventually come back to bite you (and the worse the bite will be when it happens).
Most people owe a lot less than they think they do, and getting compliant can be a much easier process than they assume.
There are many options for going from tax non-compliance to compliance.
While many people today rely on the IRS’ standard interview process to file yearly, I hope to show you that it pays to go over everything with a fine-tooth comb and take advantage of every policy at your disposal when you file.
Tax preparation software like TurboTax can certainly be useful for organizing your information, but one should always review the actual forms before filing. It’s a lot to keep in mind, but drastically easier once you know what you are dealing with or have a professional who knows the unique territory you are traversing.
About the Author: Certified Public Accountant, U.S. immigrant, expat, and perpetual traveler Olivier Wagner preaches the philosophy of being a worldly American.
In his new book, U.S. Taxes for Worldly Americans, he uses his expertise to show you how to use 100% legal strategies (beyond traditionally maligned “tax havens”) to keep your income and assets safe from the IRS.
Have a question about your expat tax obligations? Or maybe a tip or resource? Join us in the comments!
Our Tax and Residency Issues as Canadians Abroad
Moving abroad can be a romantic thought. A new culture and a new language. Different foods and new friends.
Moving abroad also opens up a new set of legal and tax requirements both in your home country and in your new one.
When we first moved to Ecuador, our family was on a temporary visa that needed to be renewed every two years. At the end of our first two years in Ecuador we decided to apply for a permanent visa which would give us permanent residency. This visa does not need to be renewed or apply for again – thus the word “permanent”.
When we first moved to Ecuador, we submitted a request for determination of residency status to the Canadian government to make sure that we were fulfilling our tax obligations. As we were deemed to be non-resident in Ecuador the Canadian government then deemed us Canadian residents, as we needed to be residents somewhere.
As a result, the Canadian government decided that we still qualified for certain benefits, including the child tax benefit which we received up until we got permanent residency here in Ecuador. Just a few weeks after we received permanent residency last March, we again sent the request to the Canadian government for determination of residency status. The form in Canada is known as the NR73.
This four-page extremely-detailed form helps the International Tax Services Office in Ottawa determine what our status and thus our obligations in Canada will be.
Of course, they ask questions such as where home is, where the majority of our belongings are, if we continue to have Canadian health insurance, etc. But they also cover things such as investments remaining Canada, mailing addresses (like a PO Box), magazine and newspaper subscriptions, and even the type of cell phones that we have here in Ecuador.
The issue that seems to be confusing our request the most, is that we continue to own a Canadian business.
Because all of our work is done online, almost everything we earn is billed through our Canadian company. Until now, we have only paid tax in Canada – but our new residency status in Ecuador is calling that into question.
I have been waiting for our Canadian ruling before I speak with tax lawyers here in Ecuador (to determine what our tax requirements will be) because the first question that they are going to ask is: “What's your status in Canada?”
Since sending the initial request for the determination of residency status, we have sent a clarification letter and spoken with them by phone many times. After almost one year of waiting, I'm told that we should expect something later this month.
Why Go Through Hassle of a Determination of Residency Status?
We could make a self-determination, but if it was wrong we could be looking at a humongous tax bill including penalties, fees, and interest.
For me, the legal ruling will give me peace of mind, knowing that when I return to Canada they won't arrest me and put me in prison for tax evasion. Worst case, of course – but who wants to deal with that on a vacation home…
A Surprise Tax Bill from the Canadian Government
Shortly after sending in the initial request for determination, we received a bill from the Canadian government for almost $8000. When I called them to clarify, they told me that this was an automatic letter/bill that doesn't need to be paid or even worried about until the determination/ruling is made.
Apparently, as soon as an individual's residency status is called into question, everything is put on hold – and past payments are requested – all automatically by their system. So for the past 10 months, we have been nervously awaiting the ruling.
So while we await the ruling from the International Tax Services Office, I thought I would share our little story with you – to help you know what to expect when you go through it.
Residency: Isn't That Where I Live?
The issue of residency is an interesting one. While you may say that you reside in a certain city or country, that doesn't mean that you're a resident there. At least not according to the government.
From what I've learned during this process there are (at least) three types of residents:
- actual/factual resident
- legal resident
- deemed resident
So for our first two years in Ecuador, we were actual residents, because we lived here – but deemed residents in Canada because we had a temporary non-resident visa in Ecuador. Meaning that while we actually lived in Ecuador all of our legal and tax responsibilities were to Canada.
And while we are now legal residents (and actual) in Ecuador, the Canadian government has told me that we may be deemed residents in Canada as well. This means that we may retain certain benefits and also tax obligations back home.
If you sort it out fairly quickly, this isn't something to worry about. If you're receiving benefits from your home country and your legal status has changed, you may not be eligible for them anymore. The best-case scenario is they will simply ask for repayment of the benefits when they find out. Worst-case scenario, well… let's not go there.
What has been your experience with residency and expat tax issues?
We Have Residency In Ecuador! (What You Should Know)
We Finally Have Ecuador Residency! We wanted to get residency here in Ecuador, so we started the process last April. It took a long time to complete all the steps (11 months) but now we have it!
Don't let the 11-month thing scare you. We were caught in the midst of some changing laws, and we changed our minds partway through.
We had started the process wanting to establish a corporation but as we got deeper into the creation of it we realized that it was way too involved and decided to pull the plug. That cost us a lot of time and gave us a lot of headaches.
After we decided to shift gears we went with the investment option, and we now have residency based on that.
We needed to travel back to Canada to get police reports, and we also had to travel out of the country again (Miami) in order to re-enter on a tourist visa because the visa we were on was running out.
The tourist visa bought us the time we needed to finish the residency process.
Are You Thinking About Getting Residency in Ecuador?
If you want to get residency in Ecuador make sure you know what paperwork you need before you start the process.
You can find out all the ins and outs of what is required by contacting the Ecuadorian consulate in your area before you come. You should also meet with lawyers on your initial visit here in Ecuador.
Things can get confusing and frustrating during the process for 3 main reasons.
1. The Laws Sometimes Change.
This leaves lawyers scrambling in order to help their clients in the most timely manner possible. They may tell you one thing about a certain requirement and while you are working on it, call and tell you something entirely different about that same requirement.
This is not their fault, they can only work within the parameters of what the government requirements are, and these are subject to change. If you find this frustrating, don't take it out on the lawyers, they don't make the laws – they just try to help us work within them.
2. The Language.
Even when we Gringos think we understand everything, we often don't. This is most often due to things getting lost in translation. This is not our fault or the fault of the Spanish speakers we are dealing with, it's just a fact of life in a foreign country.
Language is a tricky thing. What we have learned is to keep asking questions until we are completely clear on what the next steps are, and then we repeat back what we think we understand just to make sure we actually get it right.
3. Incorrect Information.
You may receive incorrect information from other expats because the laws have changed since they got their residency and no longer hold true for your experience. That's why we do not give out specific details about our residency process or requirements.
Another reason may be because your expat friends are passing on information from people who may have misunderstood the process or given wrong information to their lawyers – which would have caused a problem in their process.
This could lead to all kinds of problems, that's why it's always best to go directly to the source: Trustworthy Ecuadorian lawyers. If you need help with the legal stuff you could contact the lawyers we used, our friends Nelson and Grace.
The most important thing we needed to remember was to be patient and stay calm. Getting upset with government officials would not have helped us get what we wanted, and it probably would have given us a bad reputation.
The process could also have been slowed down so much that we would have been unable to complete it in the given time frame.
We found it best to always assume that we had made a mistake or misunderstood something.
Being apologetic usually caused the people trying to help us to feel sorry for us and made them want to help us more. In almost every case, we had made a mistake or misunderstood what we were supposed to do next.
I think if we had approached the process with an “now, I'm going to set these people straight!” attitude, we would have received the same type of attitude in response. That would have just been an ugly mess waiting to happen.
Avoiding a Gringo Superiority Complex.
The government, and their employees work differently here than in the States or Canada. Things take longer and are subject to change, but if you want something done that involves the government you have no choice but to work with it. Things will work out, but patience will be required.
It's all worth it in the end! We feel like we can really make this our home now 🙂
Have a question? Or maybe a tip to share for other expats? Join us in the comments!