It is becoming increasingly common for Americans of retirement age to spend their golden years abroad. The most common reasons for this is to live in a more favorable climate and to save money. Living on a pension or other retirement income can go much further in many countries than it can in the United States. With a few good investments, you could even be able to live in luxury.
If you’re planning to move overseas after you stop working fulltime, you should be aware that as a U.S. citizen you will still be required to file an annual income tax return and declare all of your foreign and domestic assets to the Internal Revenue Service (IRS). Those who hide income from the federal government could face fines and a prison sentence. Despite this potential penalty, only about 500,000 of the 7 million Americans living outside of the country submit an annual tax return.
Why has this large-scale tax avoidance gone on for so long? For the most part, it has been easy for individuals to go unnoticed, especially if they are not the holders of seven-figure bank accounts. This ability to hide from the IRS will soon become extremely difficult, if not impossible, with the implementation of the Foreign Account Tax Compliance Act (FATCA).
Under the law, which will begin in 2014, foreign financial institutions will be required to report any information about the accounts of U.S. citizens and permanent residents to the IRS. Foreign banks that refuse to comply will be subject to seizures of income and assets and may be barred from trading in the American investment market.
In addition to people living abroad, U.S. citizens and green card holders who live within the country but have certain foreign assets will be subject to the law as well.
In an interview with Steve Moskowitz, founding partner of Moskowitz LLP, A Tax Law Firm, Steve explained how FATCA works:
“This obligation affects U.S. citizens and green-card holders who have ‘any interest’ in an account located outside of the U.S. ‘Any interest’ can include an agent under a power of attorney and a person who has signatory authority, even with no ownership interest. Furthermore, the banks themselves face fines and penalties for failing to report US taxpayers to the IRS. As such, we expect that banks will be overly cautious with their reporting and leave it up to the individual accountholder to clear up any discrepancies or misinformation given to the IRS by the banks.”
As a result of FATCA, some foreign banks that do not agree with what they see as an intrusive law are not allowing Americans to open new accounts. So what should you do if you’re planning to leave the United States in the next year? You should consult with an experienced tax attorney like one of the professionals at Moskowitz LLP. We can work with you to figure out how to achieve your goals while minimizing your US tax obligations and complying with US tax law.