A Year of Travel…and $17,000 in Tax Savings?

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I’ve long entertained a logistically untenable fantasy of picking up and moving my life to Copenhagen for a season. Today, we explore what it takes to make a temporary or permanent international move.

We have two guests, CPA Katelynn Minott of Bright!Tax as well as Chartered Wealth Manager Alex Ingrim of Chase Buchanan USA, who walk us through taxes, retirement accounts, cultural, and ethical considerations to think about when living abroad.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Transnational gentrification

• The effects of gentrification, hostility towards Americans, and “bromads”, per CNET

• Foreign earned income exclusion, per the IRS

• Identifying your “tax home”, bona fide residence or physical presence test, per the IRS

• Tax form 2555 for foreign earned income

• 183-day rule

• Countries with “digital nomad visas”

• The foreign tax credit, per the IRS

• Various tax regimes in Europe

• US income tax treaties to prevent or reduce double taxation, per the IRS

• “Digital nomads blamed for Portugal’s high prices and housing crisis”

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Katie:

Despite all my talk of being a raging Nordophile, which is a word that I’m unsure if I’m making it up right now or not, with a passion that is exceeded in strength only by the length of my Scandinavia Instagram highlight, I’m not sure if I could ever permanently move to another country. Say what you want, but I have been US-of-A-pilled. And for all of my shit talking, the US has pleasures that the European mind cannot comprehend. Monster trucks, the Las Vegas Sphere dressed up like a basketball. Doritos Locos Tacos with Baja Blast Mountain Dew. I mean come on. Creed performing at the Super Bowl halftime show. Ranch dressing.

Katie:

On second thought, maybe I could move abroad.

Welcome back to The Money with Katie Show, Rich Girls and Boys. Today we are talking about skipping town, and why the federal government might just pay you to do it. If you’re not ready to ship off to another country for good, we’ll also hit you with the next best option today: spending the better part of a year abroad. And my apologies now to our non-US listeners. This episode is just crawling with my home country bias. I have two guests today to help me do this, both of whom hold the credentials that I lack but make up for with Fergie references.

Katelynn:

My name is Katelynn Minott. I am a CPA and the CEO at Bright!Tax and we offer US tax services to Americans with international circumstances, whether that be a living abroad permanently for many years for new expats, foreign business owners or digital nomads.

Alex:

My name is Alex Ingrim. I am American. I’m based in Florence, Italy, and I’ve been living in Europe for the best part of about 16 years.

Katie:

The finances of moving to another country can be tricky, particularly because they vary so much by location. Every country has different laws for foreigners who are settling there, whether temporarily or permanently. So it’s not exactly a topic ideal for covering in its entirety in a single podcast episode, which is why it’s taken us about 200 of them to approach the topic for the first time.

But there are a few things in the US tax code that you might be surprised and delighted to learn about. If you’ve ever considered spending a year in another country or in several countries, there are advantages that just might pay for part or even all of your time traversing the globe.

There are other considerations when moving abroad too, whether temporarily or permanently, just like neighborhoods in the United States can be gentrified when inhabitants of a certain area are displaced because a bunch of people with money show up and change the dynamics and makeup of a town.

The same can happen internationally. It is literally called transnational gentrification. One essayist writes quote, “Digital nomads getting paid in American dollars, seek cities like Mexico City and Lisbon because they are cheaper compared to other American cities. They often make twice or three times the national minimum wage and are thus willing to pay more for goods and services. This has driven prices up and in certain cases has forced locals out.”

In the FI/RE world, this is known encouragingly as geoarbitrage or intentionally seeking out an international location to live where your US dollar will go further.

Sometimes this is partially out of necessity. A couple of years ago, CNBC published a story about a California public school teacher who could not afford to retire in the US so she moved to Mexico City instead, where her savings were sufficient. The guardian covered a similar story about a San Diego couple who immigrated to Mexico because of the cost of living.

And most of these stories, they kind of tell the same tale whether the destination country is Mexico, Portugal, or Thailand: that the cost of living in the US is crushing some Americans who still want a high quality of life so they move abroad where they can afford it and they inadvertently make the cost of living higher for others.

Understandably, locals can be hostile toward Americans who relatively flush with cash distort the rental market and prices of other goods and services. The influx of digital nomads actually inspired protests in Lisbon last year.

There’s even a term that CNET reports for those who are the most egregious offenders, the “bromads”, a bromad can be loosely defined as a digital nomad, usually American and male, often working in crypto with a staunchly libertarian way of thinking. CNET reports, “They view their lifestyle as more of a right than a privilege and will make use of whatever local resources they need to maintain it without considering their impact on the local community.”

So that is something to be aware of when you are making decisions about where you’re moving, how long you’re staying, and how you plan to assimilate to and be considerate of the local culture and community.

We’ll get right back to it after a quick break.

So we’ll dip our toe in first and we’re going to start with how you might consider approaching a short-ish stint outside the good old US of A.

Katelynn:

My own love of travel began when I studied abroad in college in Chile. Then I eventually moved back to Chile in 2011 and began dipping my toe in the world of freelance tax preparation. I happened upon the opportunity to provide tax services to Americans. Now I have a growing team of 60, many of whom are Americans living abroad themselves, supporting the financial side of the international lifestyle of US taxpayers all over the globe.

Katie:

Damn, that’s pretty cool. 60. I didn’t realize there were that many. Geez. So Katelynn, you tipped me off when we first met this little known piece of the tax code called the foreign earned income exclusion. What is the headline here?

Katelynn:

Yeah, so essentially if you are earning income abroad, you can exclude up to about $130,000 from your taxable income each year and that amount increases and changes every year with inflation and it’s per taxpayer. So in theory, a married filing joint couple could exclude up to $130,000 each or like $260,000 shaved off of their taxable income for one tax year. And it’s worth noting that when I say earned income, I mean actively earnings. So through personal services that you as the taxpayer provide wages or self-employment income.

Katie:

Oh, okay. So wages, self-employment earnings. So we’re not talking about things like capital gains for example.

Katelynn:

Exactly. Earned income is not investment income, dividends, interest capital gains like you said, or retirement distributions. Though to be fair, those are certainly hard earned.

Katie:

She’s like, let me make sure that I tell the people. And when we’re talking about earned wages, you said wages earned abroad…does that mean literally I move to, for example, I move to Paris, France and I get a job as a barista and the Parisians tolerate me behind the counter with them and it’s money that is earned there? Or could it be, oh, I’m Katie, I’m a podcaster and I’m earning wages from my American based company, from other American based companies and they’re my US wages. Does that matter?

Katelynn:

Yeah, so as a individual taxpayer providing personal services, your source of your income, whether it be US income, foreign source, it follows you as the person that’s providing the services.

Katie:

Oh, interesting.

Katelynn:

So if you’re in Paris, then your income is France-based income, even if your employer is paying money into a US bank account or based in the states.

Katie:

So it doesn’t matter the source, the income as much as it does where I am when I earn it, am I understanding that correctly?

Katelynn:

Exactly. At least when it comes to personal services that you as an individual are providing.

Katie:

I see. Okay, so that sounds like a pretty good deal. I mean $130K per year per person, that feels like, okay, I can kind of pay no tax—what’s the catch here?

Katelynn:

Absolutely. So what we’re talking about here is what’s called the foreign earned income exclusion. And in order to qualify for this exclusion, there are a couple of tests that you have to meet. The first test is called the tax home test, and that means the IRS defines your tax home as the general area of your place of business. So if we come back to you as an example, your tax home is where you are as a personal finance podcaster, recording podcasts, managing your business affairs, and possibly where your recording studio is located. So once we’ve defined the tax home test, then we have one of two other tests that we have to meet either the physical presence test or the bona fide residence test.

Katie:

Okay, so when you say we have to pass these tests that first test, the tax home test in order to, let’s say I’m going to move, I’m just making this up, I am going to move to France, right? I’m not going to get a job as a barista. I am going to continue being Money with Katie, the podcaster, but hey, I would like to get this exclusion of $130,000 this year. How would I pass that tax home test if I’m recording in France? Is my tax home France and now I’m good? Or what is passing that first benchmark look like?

Katelynn:

Exactly. So if you are doing your recording in France, if your business affairs are being managed from there, as long as there’s nothing tying you back to the states from a business perspective, then your tax home is in fact abroad and therefore you’ve met that first test.

Katie:

I see, okay. I kind of want to get into the nuances of that in a moment, but you mentioned two other tests, the physical presence test and the bona fide residence test.

Katelynn:

Yep, exactly. So once you have a tax home abroad, there are two tests that you have to meet one of in order to use this foreign exclusion that we’re talking about.

Katie:

Oh, I just have to meet one. I don’t have to check both boxes.

Katelynn:

Exactly. That’s right. So the first is that physical presence test, and in order to meet that, you have to be outside of the US for 330 days in any 365 day period, and that 365 day period does not have to be a calendar year.

Katie:

Okay. So I just have to be physically outside the United States for 90% basically of the year. I assume there are some finer points of this rule.

Katelynn:

Exactly. And the way that we count days inside and outside of the states depends on international travel. For example, the day you leave the US counts as a day in the states. So for people we are trying to meet the physical presence test with, we’re very specific about keeping clear travel records and making sure that you’re not back in the states for more than that 35 days allotted to you for the tax year.

Katie:

Oh, okay. So that’s one test. The other is bona fide residence tests. So maybe I don’t think I’m going to pass the physical presence or I want to see what my other options are. What is the bona fide residence test then if maybe I think the physical presence test is a no-go.

Katelynn:

So the bona fide residence test is a bit more subjective in its application and by my standards at least a little bit harder to meet. So under this test, you must have resided in a foreign country for a full interrupted calendar year under a scenario that indicates permanency. So for example, having a permanent residence card in the UK or a visa in a foreign country that is more implicative of a long-term stay there and if you’re paying income tax abroad, this is also helpful to qualifying for that test.

Katie:

Paying income tax abroad. So we should definitely come back to that too then. So alright, you’ve kind of laid out these three things. The first barrier that anyone passed across and then one or the other, the physical presence test or the bona fide residence test, thinking that the physical presence is a little bit more clear cut, potentially a little bit easier to meet, but I mean if I’m meeting these expectations and I am checking these boxes, does this mean that as long as I’m a tax paying citizen of the United States, I get what effectively amounts to this $130,000 tax deduction? Is there a major distinction here between an income exclusion and a tax deduction that’s worth making for your average person or are they, for all intents and purposes, basically the same thing.

Katelynn:

The foreign earned income exclusion is a tax exclusion and if you think about the tax return, so your form 1040 deductions are subtracted from your gross income to arrive at your taxable income, while exclusions are income that’s never even considered part of your taxable income in the first place.

Katie:

I guess what I’m trying to wrap my head around is if there is a meaningful difference there that’s worth knowing or if the end result for the individual ends up being the same?

Katelynn:

Ultimately it ends up being the same in other parts of your tax return. For things like making a 401(k) contribution or a traditional IRA contribution, there can be differences.

Katie:

Oh, here we go. Okay, so that’s good to know because I think that we just stumbled on to maybe a little nugget here that if you are someone that’s taking advantage of this, perhaps you are self-employed and maybe Katelynn, you tell me if I’m understanding this incorrectly, maybe I’m Money with Katie, we’ll do my example. I’m getting this $130K exclusion. Well that is going to materially impact how much I can turn around and contribute to my solo 401(k) year and maybe I don’t mind because I was only making that contribution in the first place to get a nice juicy little tax deduction, but now that’s income that you can’t even really consider as income. Am I understanding that properly?

Katelynn:

Exactly.

Katie:

Cool. Okay, so Katelynn with for example, the tax home test or some of these are, I would say skew more subjective and some skew more objective. You either are or are not outside of the country for 330 something odd days of the year, but if I’m going into my tax act tax software, maybe I’m a self-filer, I like to do it myself, is there going to be a place where I am able to check a box on this or is an IRS agent going to come to my door and sit down with me and review my United receipts and be like, yep, you were in fact…What’s the honor system here for getting this stuff passed?

Katelynn:

So when you’re filing your US tax return, there is a form called the 2555 that’s utilized to take advantage of this exclusion. That’s where you’re spelling out information where your tax home was during the year. Some people have tax homes in more than one country during a year. That’s a possibility as well. And also within that form you have the opportunity to show your travel dates in and out of the states. You also have the opportunity to indicate things like I paid foreign income tax, I had permanent residency in Spain or wherever you might reside, anything on the US tax return yourself declaring. So basically the IRS is relying on you to provide accurate information and at the end of the day, whether you’re audited or not is sort of a gamble, but it’s really up to you to declare accurately the circumstances that you have during the year.

Katie:

Big mistake, IRS, I’m pulling a fast one and left on you. Okay. So this is great. You mentioned if you pay foreign income tax, which is something that I initially thought of when I was like, this feels like it’s too good to be true, which is it kind of feels like the other country is getting the shaft here. If I’m now a Parisian and I’m Money with Katie show from gay Paris in a cafe over there and I’m living there for 300 and something odd days a year, at what point are they going to go, wait a second, you need to be paying US taxes. You’ve been here for too long.

Katelynn:

I think it depends on how you look at it and take advantage of it. There are certainly foreign immigration and taxation considerations to keep in mind before you launch into full-fledged digital nomad podcast or abroad mode. Depending on where you decide to travel and work, you have to be sure you’re not tripping any alarms in the income tax system that you’re traveling to.

So in other words, if you’re entering France with a tourist visa, are you even allowed to work in France while you’re in country on that visa? And that’s going to vary depending on where you go and what type of visa you travel with. But depending on how long you stay, you might wind up triggering the definition of a tax resident, which varies country by country, but high level, the 183 day rule is a point at which you often become a tax resident kind of globally.

Katie:

183 days. Okay, so that amounts to roughly it sounds like about six months, is that right?

Katelynn:

Exactly. And many tourist visas don’t even let you stay that long.

Katie:

Is there a sweet spot that you could hit here or a way to schedule and plan a trip wherein you are truly nomadic and you’re moving around enough that you do not require a visa in any one place and so you’re not really putting yourself at risk of tripping those alarms. Maybe I want to go all over western Europe, I don’t want to just stay in France. So is there an optimal way to structure a trip of that kind that meets the US based requirements but then does not trip up anything on the other country’s side?

Katelynn:

Yeah. And I do think that’s sometimes where the ethical concerns come into play because when you enter a country on a tourist visa, probably the fine print in that tourist visa says that you can’t be working and generating income on that visa. But a lot of people do it and it’s sort of a reality with a digital nomad world now where people are going abroad, traveling from country to country, understanding the 90 day tourist visa that’s allowed to them and they’re doing their work digitally sometimes with a VPN working for a company from abroad and sometimes their employers don’t even realize it, but certainly the country that they’re traveling to for a few weeks or a few months doesn’t perceive the income tax realization related to the work that they’re doing in country.

Katie:

Oh, okay. So when you say tourist visa, I mean is this almost like a default visa that you have if you just buy a plane ticket there and go for a week, it’s like you’re on a tourist visa even though you’re not formally applying for anything like that?

Katelynn:

Exactly. There are more and more digital nomad visas available now, and a lot of countries are offering those now as a way to enhance digital nomad tourism, if you will, where people are coming, staying, working for a few months and staying on the legal side of it rather than slipping under the conditions of what a tourist visa would permit.

Katie:

I see. So it kind of comes down to how slippery and loose your moral code is and how fast and loose you want to play with the other tax codes. Whether you’re like, I’m going to just stay for under it sounds like 90 days in each place. I’m going to go two to three months here to two to three months there. I’m just going to kind of continue to work, not really mention it, not flag it to anybody and then move on. Or if you are a more upstanding citizen and you want to do it the legit way, you can do this, you can pursue digital nomad visas, which will then keep you on the right side of your moral compass with you are paying into the tax of the countries that you’re maybe staying in and the way that they would prefer that you do.

Katelynn:

Exactly.

Katie:

Okay. Well I will leave that to you, dear listener, as to how you want to approach that. And so let’s say I end up falling in love with a country abroad and I decide, you know what, I want to stay longer. I was just planning on doing this for six months and whether or not, I guess at the six month mark, I would probably have to be doing a different sort of visa to make sure that I’m good to go and I end up paying some income tax there. So for example, I’m in Denmark and I’m like, man, Copenhagen’s great. I want to stay through the end of the year here and maybe I wasn’t planning on staying. How do I then approach that type of situation if plans change? I decided, yeah, I should probably be paying into this Denmark tax base and I don’t want to fumble the bag with my US tax suite deal that I’ve got with the good old boys at the IRS. How would a situation like that play out?

Katelynn:

So if you move abroad more permanently, there are still tax benefits to be taken advantage of on your US return to, at the very least, eliminate double taxation. The foreign tax credit can be used to reduce your US tax bill based on what you pay in foreign income tax. So if you’re moving to a country with the lower tax rate than the US, you still may come out net positive, but if you are moving to a country with a higher tax rate, at least you’re going to eliminate double taxation and not end up paying tax twice to two different countries.

Katie:

Are there any countries that you can think of off the top of your head that have a lower tax rate than the US that people would typically do this in?

Katelynn:

Yeah, A lot of countries in South America come to mind. Central America, Costa Rica comes to mind. A lot of the European countries of course have higher tax rates. So for taxpayers in Europe, we’re often just eliminating double taxation for people rather than trying to create tax efficiencies.

Katie:

But that’s not nothing. I mean that’s still pretty good if you’re worried about having to do both. Are there any examples that you can think of with the digital nomad visa just so that we have maybe an example country or some terms that someone would be looking for to get familiar with how this might work?

Katelynn:

Yeah, so Spain for example, has a digital nomad visa that’s been around for a bit now and that allows you to apply at least from the states for the visa and prepare your move abroad, get ready to launch into the digital nomad world, if you will, and spend a year in Spain legally able to work and take advantage of their tax rates, which are flat 24% for digital nomad under this visa in Spain.

Katie:

Amazing. So let’s flesh out a little example. I am intrigued by this. Let’s say that I earn next year $150K and it’s our joint income, my husband and I who filed jointly, we together between us have $150,000 and we want to whack off that initial standard deduction, which next year I assume will be about $30,000 because it’s almost $30,000 now. So between us, we’ve got $150K, we’ve got that standard deduction, and then we have this amazing income exclusion and we’re meeting all the rules. Maybe we are playing a little fast and loose, but we’re going one month per country, we’re just popping around. Does this mean that that would drop my income after the standard deduction that is below the foreign income exclusion and I would basically owe, we would owe nothing in federal taxes. Is that too good to be true? I feel like I’ve got to be missing something here.

Katelynn:

No, you’re exactly right. The income tax bill of a couple married filing jointly earning about $150k is going to come in without the foreign income exclusion at around $17,000. So if you grab it and use it to optimize your tax bill in a year that you’re living abroad, traveling internationally, I think that’s a fantastic opportunity to fund your international travel plans.

Katie:

Yeah, so it’s just about $17,000 difference in that case. Oh my goodness. Okay. So what about FICA taxes, state taxes? I mean I assume payroll taxes or state taxes still would come into play in some way?

Katelynn:

Yeah, so the foreign income exclusion is a federal level benefit and there are a handful of states that recognize it as part of the state tax return. Colorado comes to mind, New Mexico, Missouri, California unfortunately does not, but the FICA tax is not impacted by the foreign earned income solution. So if you’re working for a US employer, and if you’re self-employed, you’re still going to owe social security Medicare taxes while you’re living and working abroad.

Katie:

So that would be, you’re either 7.65% if you’re a W-2 and then you’re 15.3% if you’re a self-employed person listening to this. So I want to return to that point you made about the $17,000 savings just in this example. So that’s the tax savings that you get at that income level in the marginal tax bracket that you guys are hitting. But if you does this, I’m assuming in trying to do some fast math here, I assume this is scaling up then with the marginal tax rates because is it wiped off the top so to speak, such that if you have a hundred and something thousand dollars of income in the 32% bracket that your tax savings are 32% tax savings, not 24%, or how does that work?

Katelynn:

Yeah, they take it from the bottom. So it’s the first $130,000 of earnings, you’re going to eliminate the tax associated with that amount. Then your overall tax bracket, your marginal rate still stays at the top end, so the income in excess of the exclusion is going to remain up there.

Katie:

Oh, I see. Okay. So in my mind that is another key difference in the way we think about this between an exclusion and a deduction because when I think about deductions, I’m like, oh, my savings are in my highest marginal tax rate. Whereas with this exclusion to your point, it’s covering up and being like everything below $130K, it’s like it’s not even there. Does that mean that your $17,000 then is the maximum that someone would save? I guess that is the married couple example. But is $17K kind of like the, it’s basically that is what’s at stake here is around $17,000.

Katelynn:

Well, $17,000 is one exclusion. So when you’re a married filing joint couple, you can take an exclusion for the taxpayer and for the spouse. So at the end of the day you can double up on the foreign earned income exclusion. So if just one earner is generating income during the year, let’s say that one earner makes $300,000, you can’t both use the exclusion, only the person earning the income can use that $130,000 exclusion. But if you’re each earning $150,000 to get a total of $300k, then you’re each eligible to carve out this $17,000 in savings. So as a married couple, what, $34,000 in tax savings.

Katie:

$34,000 in savings, I mean that’s almost $3,000 a month that can go to funding your travel in that kind of best case scenario.

Katelynn:

Exactly.

Katie:

Or $1,500 a month if we’re talking about the single earner best case scenario. Oh my goodness. Okay. So one thing that’s occurring to me right now is that if you spend the better part of a year in another country, I would say there’s a non-zero chance that you might decide you actually prefer living in that country and you might not want to go back to the United States depending on how your experience is. And maybe you meet a new friend group over there, you meet a romantic partner there, you might not want to leave. So if that’s the case in your interested in a more permanent move abroad or perhaps a retirement abroad, how do you counsel clients through that and the broader tax implications or financial implications of that? What happens then?

Katelynn:

Yeah, I think this happens a lot. I think actually the number one reason people move and stay abroad is because they’ve found love. I may have been guilty of that myself, but the ultimate information to really understand the most important thing is to understand that as a US citizen, no matter where you live in the world, you are on the line for US taxes. And it’s an area that there’s not a lot of information out there on the United States is only one of two countries in the world that has citizenship based taxation. So a lot of people don’t realize that they have to file US taxes from abroad. And in fact, I talk to people every single day that just realize, oh shit, I have to file US taxes and I’ve been abroad for 10 years or 15 years. So knowing that you have to file us taxes in the first place is a good first step. And beyond that, of course, you need to establish yourself from an immigration perspective wherever you live abroad. There are people who, once they’ve been abroad for five, 10 years, an established citizenship in the country that they live in decide to expatriate from the us and oftentimes that’s for US tax reasons.

Katie:

Oh, so you’ll expatriate meaning you are, is that renunciation of your US citizenship? You’re no longer a citizen of the United States?

Katelynn:

Exactly, yeah. You go to the US embassy and turn over your passport and say, I’m done with this. And a surprising number of people do that because they’re just done with the US tax system following them around.

Katie:

Is this like a vasectomy? Can it be reversed or are you done? You would’ve to take a citizenship test if you wanted to come back in.

Katelynn:

Right. I would imagine you have to go through the whole visa application process again to the states, maybe get a green card and be eligible for citizenship after five, 10 years. I’m not sure what that process looks like.

Katie:

I would so fail the citizenship test. It is not even funny. It would be an embarrassment. Oh my goodness. You’ve laid it out very straightforwardly, which I appreciate.

But I do see that there is a fair amount of complexity here that someone is going to have to manage and deal with and maybe I’m not down for them. Maybe I’m looking for a shortcut. And you’ve mentioned that people find love abroad, so is there any sort of fast track shortcut that I should be aware of here? If I’m a listener and my travels to another country lead me to love,

Katelynn:

I would say find yourself a foreign hubby and fast track your way to a permanent residence in the country that you want to go to. That’s what I did. Worked for me, lived abroad in Chile for nine years and had permanent residency the whole time.

Katie:

Okay, so this is like a spousal visa.

Katelynn:

Exactly.

Katie:

Alright, Rich Girls and Boys, you heard it here first. If you want to avoid all of the complication, you just need to lock down a spouse from your country of choice. No pressure. Okay, Katelynn, thank you so much. This was truly illuminating.

Katelynn:

Thanks for having me.

Katie:

We’ll be right back after a quick break.

Alright, so next up I really wanted to talk to Alex about more permanent moves abroad. He and his clients live in Europe.

I have a hunch that there is a not insignificant portion of our audience who is interested in retiring abroad and honestly, they’d probably prefer to go sooner if they’re currently paying a few thousand dollars a month to put their kids in daycare in the United States, but they aren’t quite sure what that process would look like. And I know it differs probably substantially by country, but can you give us the lay of the land for your clientele?

Alex:

Yeah, absolutely. So we feel like there’s an order to the process of trying to move abroad, and the first real big question that you have to answer is, can I legally live in the country that I’d like to move to? Are there any visa options or any paths available to me to actually live in that country? So some countries are a little bit more onerous than others. Some countries have more visa options available than others.

Then the next thing that you might want to look at is the cost of living there. So is buying a house or renting an apartment really onerous for you as well? If you’re looking at moving to a place like Barcelona or a place like Rome, what’s your budget? What does your lifestyle actually look like in those places?

And then the kind of final step and where we come in as financial advisors is helping people understand their new tax burden because once you move abroad as an American, you retain your US tax residency, but you can pick up a new one.

So our Italian taxes higher than if you’re living in the state of Texas. Yeah, probably. Italian taxes might be higher, but there might also be some special tax regimes that you fall into. And so that’s actually another cool part of the planning process is once you start adding all of these things together and marrying them up, like the immigration regime that you’re looking at, the cost of living that you’re looking at. And then are there any really different or unique tax regimes that are available in the country that I want to move to? What does that picture look like for me?

Katie:

So Alex, you are using this term tax regime. I’m actually not familiar with that phrase. What does that mean?

Alex:

So it’s actually something that’s become more popular over let’s say the last 10 to 15 years in a lot of different worldwide and European jurisdictions. So what you’d normally have is you would have income tax scale rates that are the normal rates throughout every country. You’d have the tax rates that you’d pay on your income, however, to start attracting new residents and sometimes to start attracting some of their citizens to come back to the country that they’re originally from.

Certain countries have instituted what you would call a special tax regime. So there was one that was very popular in Portugal called the non habitual residency regime, which officially ended at the end of last year and that was what you would think of as a 10 year tax holiday. So for someone that had not been previously resident in Portugal, they could come to Portugal, become tax resident there, lived there, and they would have a lower tax rate on various different income streams including things like retirement income and even on some types of earned income depending on their job for that 10 year period. So there’d be lower tax rates than you would expect with kind of the normal Portuguese tax system.

So quite a few countries have these in place. Now there are quite a few different types of tax regimes available in Italy where I live. One is to try and attract working age population to come back. So it’s called the Impatriati Regime, which is trying to get people to come back and live in Italy. They have a kind of retirement flat 7% flat tax regime for people that might want to retire in Italy, and they even have a high net worth regime where you just pay a 100,000 Euro flat tax and that is kind of where your tax liability to Italy finishes. So many, many different countries around Europe have these types of tax regimes now where they’re trying to attract people in, if that makes sense.

Katie:

It does make sense and that’s really interesting. I almost remember, I think traveling to the Netherlands several years ago and someone telling me about this like, oh, your first five years here you don’t pay any taxes. Something to that effect. So thank you for the clarification.

So devoted listeners of The Money with Katie Show have probably been squirreling away their nest eggs in things like 401(k) and IRAs to accounts that I assume the French people, for example, have blessedly never heard of. So if I have aspirations of retiring in a place like Provence, but I’ve got my entire life savings in an American tax advantaged account, what happens then?

Alex:

So that’s actually a very interesting example. So picking France is a different situation than you might think of. Usually the way that the taxation of those accounts is governed is that you have to go in and look at the double taxation agreement that the US has with the country that you reside in. So that’s really your starting point to determine how are my distributions from an IRA going to be taxed? Are they covered within the double taxation agreement? What would the interpretation of that be?

Because by and large, you are totally right. If you go to most European countries, there really is no easy equivalent for what is an IRA. There’s really no easy equivalent for what is a Roth IRA. So something that’s a qualified account that’s going to end up being tax free on the distributions.

So France is a really interesting example because the double taxation agreement actually identifies that in France you would pay US taxes as your primary tax liability on your IRA on your Roth IRA, meaning that it’s still tax free on your social security and on any private pensions that are derived from the US. So France is actually one of the few examples of a jurisdiction that you could move to and your retirement income would primarily just be taxed in the us. It’s not something that’s really that well known or spoken about, but France is actually a really good retirement jurisdiction for Americans.

Katie:

Huh, that’s really interesting. So I’m happy that I accidentally chose a good example of this. What would be an example of a country where it’s perhaps less advantageous to be living there but drawing down on say a pre-tax account or a Roth account that’s based in the US?

Alex:

Yeah, so let’s go to the other extreme because there are examples that are in between as well because of their double taxation agreement. So the other extreme might be a jurisdiction like Spain or Italy where the double taxation agreement would outline that you owe taxes primarily to your country of residency, which would be Spain or Italy. So you’d be taxed on your social security or your IRA distributions at their income tax rates. Now imagine Spanish income tax rates are significantly higher than American income tax rates, but not just that they start at much lower levels. So once you’re getting into 50 or 60,000 Euros worth of income, you’re looking at easily 40% plus marginal tax rates. In Italy, it’s the same thing at 50,000 Euros plus, your marginal tax rate is 43% and you have a lot less deductions to play with, and then a Roth IRA is not tax free. There are a lot of different varying opinions on what you do with a Roth IRA in those countries, but suffice to say it’s no real better than a taxable brokerage account.

Katie:

Oh my goodness. That is kind of a revelation to me because I think there are probably some people that are listening to this going, oh, wait a second. Okay, well this totally changes the calculus for where I’m investing right now. Then if the later tax advantages to be reaped are kind of null and void if I’m in a country where I’m going to have to pay their marginal tax rates anyway. I’m curious, you mentioned that there’s really no equivalent account of a 401(k) or IRA in countries like these. How are the French people, the Spanish, the Italians, how are they saving for retirement then? Are they or does their system work differently?

Alex:

So the systems in each of these countries works differently and in some countries have savings type products or pension type products that are more equivalent to the US system. So for example, the French system is another kind of interesting example where they have these types of accounts called PER, which is maybe more equivalent to our 401(k) or IRA, which would be a pre-tax account that your would be tax deductible. And then they have something called a PEA, which is maybe a little bit more equivalent to a Roth type of account and they have very similar types of private pension structures maybe in the Spain or Italy, but they might not be market based, right? It’s not about investing in the stock market.

And one thing that people do a lot more, because when you think about the US legal system, we live in a common law system, continental Europe’s a civil law system, so you don’t have things like trusts, you don’t have as much individuality in your savings and in your planning either you base your retirement more on state-based pensions and sometimes on the type of job that you do, there might be an extra pension allocated to that for example.

But what you would use your planning or base your planning on is actually an insurance-based products because that’s more what the civil law system acknowledges. So you use things that we would think of as annuity products in the US are much more popular in Europe because they are tax advantaged, and that’s kind of hard to wrap your head around because we’re not used to hearing positive press in the US about things like annuities, but in Europe, those types of structures are what is tax advantaged.

Katie:

Wow, okay. That is a bit of a mind-blown moment for me because to your point, I don’t typically think of annuities or insurance products as something that I would ever dabble in, we’ll say in the United States as an investment product.

So this might feel like an anachronistic question given most of our money these days really is just numbers on a screen anyway, but how does one move, move their assets to their new country? Are they converting it to a new currency? Is it staying in US dollars and you convert it as you use it? Is there an approach here that is recommended because it’s kind of something that, it seems like a silly question, but I’ve always wondered how that works.

Alex:

No, it it’s a great question actually, and it’s one that we get all the time, and I think it’s a really, really important question because it brings to light the way that the US tax code works and how incompatible our system is with other systems. That’s actually not always a bad thing either. We get asked the question a lot, do I need to be moving my IRA to a European IRA or should I move all of my taxable savings like in my taxable brokerage account or in my savings account to Europe and put it in a European bank or put it in a European brokerage account? And the answer to that is no. There is no equivalent of an IRA or Roth. If you take the money out, then you’re essentially distributing it and it’s a taxable event. In Europe, the investment landscape is a lot different.

So the investment products that you would think of there, like mutual funds and ETFs that exist in Europe and are domiciled in Europe are not US tax compliant. They are what would be called passive foreign investment companies for the US tax code, and you would get charged your highest marginal rate of income tax on any gains on those products, and there are a bunch of really onerous reporting obligations when you own those types of products. So you can’t really invest in anything in Europe and really remain US tax compliant. So what we recommend to our clients is you keep your money in the US custodians like Schwab, like Fidelity, they’re much cheaper than the equivalent European custodians. We don’t really have a lot of free trading over here in Europe. It’s not as big of a thing.

So what you want to do is keep your money in the US, invest your money in the US, keep the money in those IRAs and those 401(k)s and those Roths, and then as you want to spend the money, you can move it to Europe.

So again, you can use a foreign exchange company to convert your money and then send it across. Some people just use their bank to wire money across to their European bank. Sometimes you can get charged pretty high FX fees, foreign exchange fees, for doing it that way. So the infrastructure and the plumbing that you build for your financial life when you move abroad is really important. We also actually tell people to keep using American credit cards because European credit cards don’t have as high of limits and you don’t find the same points and loyalty programs over here.

Katie:

That is so fascinating. I’m kind of grinning though, like oh my gosh, finally somewhere where the US kind of has a leg up because typically I think about the systems in places like France and Italy and Spain as being really superior. So I’m like, well, at least we got credit card points going for us. We don’t have healthcare, but we got points in miles. So that’s a plus, I suppose.

I’m curious how cost effective or not cost effective something like this is, and I’m sure it depends on where you’re going, but is this something that your average retiree could swing or is there a certain net worth threshold that you’d probably need to be clearing before something like this would make sense? I get the impression that there is some retiring abroad that has the intention of going somewhere where your US dollar goes further or where things are going to be cheaper for you than if you stayed in the United States. I’m not really getting that sense about retiring to a place like Italy. So can you give me and our listeners an idea of the level of wealth that we are talking about here?

Alex:

I think this is actually a really interesting misconception because I’ve spent most of my adult life now in Europe and seen how Europe and the US have changed and the cost of living in the US is far, far, far more expensive than it is in Europe, even in some of the most expensive places. We have clients in Paris. I know quite a few people that are trying to raise a family in a city like Paris, and what they’ve told me is it’s far cheaper than raising a family in a place like San Francisco or New York.

But just going back to the retirement aspect of this, what we see often, and I would say at least every month is we see people that are able, we have clients that are able to retire earlier than they would be able to in the US and they’re able to retire with far smaller pension pots than they would be able to retire in the US.

So it’s quite common to see people in places like Portugal, Spain and Italy that are retiring and really only spending the money that they have off of social security. So they’re really only spending their social security benefit. I think it’s more than achievable. I live in Florence in Italy. If you are used to a European style lifestyle over time, it’s more than achievable to raise a family of $4,000 or $5,000 a month. It’s definitely something that you can budget for and make happen. So we have retirees in places like Portugal, in places like Spain and places like Italy that spend less than five grand a month.

That includes healthcare because healthcare is typically far cheaper. Some of the countries that you move to also healthcare essentially comes with the visa. So in France, as long as you’re a legal resident, you get access to the public healthcare. It’s not to say that you wouldn’t also want private healthcare, but private healthcare is usually what you’re spending a month in the US you would spend a year in continental Europe essentially is kind of how you can budget for that. So we feel that it’s far easier to retire in Europe early and with a lower pension pot than you would be able to in the US we have people tell us all the time they’d never be able to retire in the US with their net worth that they have.

Katie:

Oh my gosh, okay. That is news to me. I thought for sure you were going to tell me that this was a no. This is rich people stuff. You got to really make sure that you have a solid nest egg if you’re going to come and try to swing it over here. So that is pretty encouraging. I think there’s probably going to be people that are like, huh, I hadn’t considered this. Maybe now I am.

There is another situation though that I want to ask about, which is that someone might retire relatively young, maybe they’re in their fifties and they decide that they want to retire abroad and then maybe we’ll say in their seventies they decide, you know what? Actually I’d like to move back to the states. Is this a no takesies backies thing financially or is it a relatively simple thing to unwind?

Alex:

Because you need to keep your asset base in the US, and because you need to create that financial plumbing that I was talking about in the US where you maintain your qualified accounts like your IRA and Roth in the US, you maintain your taxable brokerage account, you maintain your bank accounts. It’s pretty easy to then move back to the US if you need to. And one of the planning principles that we try to put in place is that we want you to have the utmost flexibility so that if you do want to move back to the US; a great example of this is if you retire early and then one of your kids has kids, so all of a sudden you become a grandfather or grandmother and you want to move back to the US to be closer to your grandchildren, which is very common in international financial planning, then we don’t want to do anything that would make it harder for you to do that.

So you maintain your Roth IRA, so access to tax-free money, which is an important part of your planning. The only piece that I think people struggle with is if you are used to and you’ve built a financial plan where you’re spending let’s say four or five grand a month and then all of a sudden you want to move back to the metro San Francisco area or Seattle or a place like that that’s expensive and getting more expensive as time goes by, you might then struggle to live the same quality of life. So it’s about understanding the sacrifice that you’d make in order to leave Provence, for example, and go back to California and how you would actually adjust.

It’s actually, there’s also a principle of, it’s something called reverse culture shock where when you go back to your own culture, you struggle to fit in again because of the experiences that you’ve had abroad.

Katie:

Oh, wow. So something that we had talked to Katelynn about for this episode was that sometimes Americans will renounce their US citizenship when they move abroad. I’m assuming that in this case, this retiree could not or would not be renouncing citizenship because keeping that door open is how you would be able to come back. Yes?

Alex:

Yeah, and I think one of the questions that we ask people when they start talking about that is we say, okay, well what problem are you trying to solve by renouncing? What is your pain point that you’re trying to alleviate by renouncing your citizenship? Because if we just go through some of the jurisdictions that we talked about, so if you renounced in France, you would lose all the benefits of that double taxation agreement or many of the benefits of that double taxation agreement living in a place like Italy or a place like Spain, your tax problem is actually an Italian or Spanish tax problem primarily unless you’re on some kind of special tax regime.

So renouncing actually doesn’t solve anything in those three jurisdictions and those three examples that I’ve provided as far as solving a tax problem, it actually maybe creates more problems for you.

So that’s the question that we pose, and I actually always throw that out there as an example. What if something happened in your family life that would make you want to go back to the us? Do you want to close off that avenue? And most, for the majority of people, the answer is no.

Katie:

Okay, that’s fascinating. I’m also kind of chuckling, thinking back on the culture shock, the reverse culture shock, because you mentioned you’ll get used to the pace of life there, and it reminds me of, I haven’t really spent much time in Europe, but in the time that I did spend there, I remember waking up on a Sunday and nothing was open and I was like, what is this? Why isn’t the coffee shop open at 7:00 AM on a Sunday? I have emails to answer, bringing this very American perspective to the vacation and then kind of poking fun at myself after the fact being like, yeah, you talk, you want that European pace of life, the work-life balance, and then you get over here and you’re pissed off because things aren’t open on Sundays. But it just kind of makes me laugh that you could then grow accustomed to that and come back to the US and be like, oh my gosh, this is way too fast paced. This is way too intense.

To close this out. I would love to know if there are any countries that are particularly friendly to Americans in your experience, and then maybe some others that aren’t when it comes to things like taxes, finances, the paperwork hoops, visas, what have you, and maybe friendly and unfriendly in other ways. I will leave that to open to interpretation, but I have heard that we’ve given the example of Paris, that Parisians don’t love foreigners, and so I’m kind of imagining myself trying to assimilate in a place where maybe the perspective or the view of Americans is not so favorable and how that might be something to consider before you pack up and move your life somewhere else.

Alex:

Yeah, it’s a good question and there’s a few things to unpack there. So I think looking at immigration pathways and the easiest places to move to, it’s a good question and it’s one that people don’t often ask themselves. So if you look at the places that are actually easy to move to have really friendly tax regimes and are really actually very open-minded.

This comes to my mind first. I lived there, I moved to Malta for work nine years ago, so I worked in Malta for about three or four years. And so that’s just an island nation off the coast of Sicily. So very close to Italy, very Italian and very English. And English is one of the official languages in Malta. So very easy from an immigration standpoint, very easy from a tax standpoint, very, very friendly people and it’s gotten a lot of press lately, and it’s a fantastic to live in a great quality of life.

A place like Cyprus is very similar. Again, easy immigration, easy from a tax point of view, these are island nations, so they’re used to having to attract people to having to be dynamic, to having people come to their shores, and they’re actually very dynamic economies where things are growing and changing constantly.

Portugal also has tons of visa options. It’s why Portugal is so popular. They used to have a really nice tax regime, that non habitual residency that’s now fallen away. And for retirees, it’s not really the same level of attraction anymore from a tax perspective.

France has tons of different ways to immigrate there, and I think Italy is starting to catch up with everybody else to offer new immigration pathways. They now have a digital nomad visa. They have a special tax regime like that, 7% flat tax regime in Southern Italy. That’s great.

From a cultural point of view, I’ve lived in I think six or seven different countries, many of them in Europe, I think as far as who’s very welcoming to outsiders, it’s kind of countries that are used to having of different groups of immigrants or lots of different groups of people that have come to their shores. So again, the island nations, like Malta and Cyprus are always really friendly. But I think it’s also really important to understand whenever you move to a new country that people are going to have different levels of openness. They’re going to have different experiences and they’re going to have had different experiences with Americans or with people from other backgrounds.

And one question that people should ask themselves certainly is how willing they are to learn the language, which cultures are more open to helping you learn the language. For example, I found that Italians are much more forgiving of my mistakes in Italian than the French were when I lived in France of my French.

But I also found that as I learned the language, the French and Americans had a lot in common. We had a lot of the same views, a lot of the same perspectives. We were both really proud groups of people that had a lot to be proud of, and that with different nationalities, like say for the Italians, they’re also really proud, but maybe more on a regional level. I live in Tuscany. The Tuscans are super proud of their region, very, very proud of Florence. It’s the cradle of the Renaissance. You’ve got all this beautiful artwork in these beautiful buildings. So people do get a little bit wary of, okay, you’re coming into my city, the city that we’ve built over the last 500 years to be one of the most beautiful cities on earth. So it’s always just about shifting your perspective, if that makes sense. And understanding the perspective of your hosts and that you’re new and they need to be able to trust you and understand you.

Katie:

That totally makes sense. Did you catch the most recent season of White Lotus in Italy?

Alex:

I did not. I heard a lot about it, but I just didn’t watch it.

Katie:

Oh, darn. I was going to ask for your thoughts on accuracy.

Alex:

I heard a lot about, apparently the towns in Sicily where it was filmed, the real estate prices shot up pretty dramatically as a result.

Katie:

Oh really?

Alex:

Yeah, they got a lot of interest.

Katie:

Well, actually on that note then, one of the things that we’re talking about in this episode is some of the ethical and cultural concerns of taking your maybe flush with US dollar self to a country where you’re probably out earning just by nature of how work differs.

I mean, I know I’ve spoken with people who work for international companies and they got an offer in the London office and they got an offer in the New York office, and the New York offer is twice as much money, and they’re like, oh, well…

I’m curious if that factors in at all to the type of work that you do, the planning, the consideration set, just because I think this White Lotus example is actually perfect that the influx of wealth, the influx of people who can pay more for things, how that slowly changes local economies and why that might make locals increasingly hostile over time. I think there were some protests in Lisbon last year because of the influx of digital nomads, and you’ve now referenced a few times that there was some visa or some program in Portugal that has now been wound down. I’m wondering if those two things are connected or if you know anything about that?

Alex:

I would say that they’re probably loosely connected. Winding down tax advantages for the inbound retirees and for some of the inbound digital nomads in Portugal is certainly related to a lot of the political and social pressure. I think one thing that we’ve got to think about, and I’ve given presentations and webinars on this in the past, is that if you look at the average salary in Portugal, I think I have figures from 2020. The median salary in the US was about $54,000 a year, and the average salary in Portugal was about 18,000 Euros a year. And that gap would’ve only widened in the past four years. And that if you think about some really important public functions, like a nurse in Portugal, a nurse in Portugal after taxes working full time might only take home about 800 Euros a month. So when you look at a city like Lisbon where rents are skyrocketing, I’ve met many people that tried it out and decided that Portugal wasn’t for them from an ethical perspective, that it’s not just American money, it’s global money that floods into these economies when there’s golden visas, when there’s these special tax regimes.

And I think that if structured correctly, those regimes can be really beneficial for the local economy. But actually, just to go back to your question, what’s happening is that this is changing these economies quickly, not slowly. If it happened slowly, it would probably be a good thing, but it’s changing them quickly and it’s changing segments of the real estate market quickly.

And you’re seeing people asking pretty obvious questions of, if I’m a citizen of this country like a Portugal, why am I paying 40 something percent tax on my income? That’s 50 grand a year when a foreign person can come in and pay 10% tax on their social security income? And I think those are probably fair questions to be asked. And the wage differential, it is so huge that you can’t escape seeing it when you go to some of the big cities.

Katie:

Thank you for that answer. I really appreciate that. I mean, I am glad that that’s something that the financial planning industry, and particularly the segment of the industry that’s focused on Americans moving to places where the locals probably earn significantly less…I’m glad that that’s a consideration because it does sound like it’s a real issue. And you highlighted this nuance that occurs to me as being important here, which is that it’s the fact that it’s happening very quickly and that if it were happening slowly, it might be a different story, but it’s the speed with which things are ramping up that is leaving people behind. Is that a fair interpretation?

Alex:

And I think it’s in countries where they’re relatively small and the infrastructure wasn’t there to accommodate this. So I always draw the contrast between Italy and Portugal. Italy’s got five times, six times more people. It’s got a pretty big infrastructure of professionals of just general infrastructure. It’s got industry they make and produce a lot of great stuff in Italy, right? Not saying that they don’t in Portugal, but it’s a different type of economy. It’s an economy that’s easily overwhelmed, if you will. So Italy’s structured all of their programs to attract a specific type of person that their economy needed while Portugal did not. It was a pretty open door as to who might come in as a digital nomad or a retiree, and that’s why it happened so quickly and was so overwhelming, if that makes sense.

Katie:

It does. Thank you very much for joining us today.

Alex:

Yeah, happy to be here. Thanks for having me.

Katie:

Alright, so now that we’ve talked to a few experts, I have a couple big takeaways because we’ve covered a lot in this episode, both for temporary and semi-permanent or maybe even truly permanent moves, as well as some of the ethical and cultural considerations. But there are a few things that really surprised me to learn.

The first is that the foreign earned income exclusion could be a major game changer. If you are trying to spend a year’s worth of time bouncing around the world and you’re not planning to spend too much time in any one spot. It can be for a couple in which each person earns $130,000 or more per year, up to $34,000 in tax subsidies to fund your travels, which is pretty amazing. I’m honestly surprised that I’ve never really heard of this before.

The second is that your Roth accounts specifically may become somewhat worthless to you, or rather not worthless, but decidedly less valuable if you retire somewhere else. So if you’re pretty sure this is something you’re interested in doing, it might make sense to prioritize pre-tax accounts even more because it means you’re at least recognizing the upfront tax break that a Roth account does not give you.

Thirdly, Alex’s mention of insurance products and annuities as being particularly valuable and tax advantaged in Europe where his American clients live, highlighted for me that, if you know this is something that you want to do, you should probably consult a financial planner like Alex who specializes in this type of niche financial strategy in your accumulation phase because your most optimal path might actually be very different than what our US based financial planning assumes, which is that you’re going to continue to live and pay taxes here.

And finally, I feel pretty differently now about the idea of geo arbitrage after producing this episode because it’s clear that it really does produce losers, particularly if it’s happening quickly. The way that it’s often positioned in fire rhetoric is like, “Oh, you can go live like a freaking queen in these countries where everyone else is super poor” strikes me as particularly objectionable and unfeeling about the impact that you might have in a country that is perhaps a lot more lucrative for you to live in, but your presence might make it worse for others.

But if nothing else, I am feeling inspired to start planning my adult gap year abroad now that I know I’ve got about, we’ll call it $17,000 in the foreign earned income exclusion.

And that is all for this week. I will see you next week, same time, same place on The Money With Katie Show. Thanks for going on this little journey with us.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Kate Brandt.