Is your company offering you a once-in-a-lifetime opportunity to work in the Tokyo office? Or have you always wanted to spend a few years as a Berliner?
There are myriad reasons why you might be entertaining the idea of becoming one of the millions of U.S. expats who live overseas. But before you pack your bags and move halfway across the globe, you have to consider the impact on your finances.
After all, there’s a lot of planning involved with taking a plunge into international waters. Between work visas and figuring out what to do about taxes, the amount of coordination and paperwork involved can be enough to make your head spin.
So before you begin daydreaming about an office with a view of the Eiffel Tower, start getting your ducks in a row and take a peek at our list of important financial things to know about that expat life.
1. Finding a company to sponsor your employment will make things a lot easier.
Tempted to move first, worry about landing a job later? Not so fast, says Megan Fitzgerald, a seasoned American expat and founder of international career consultancy Career by Choice. “The challenge of securing a work permit can be anywhere from not so bad to completely impossible, depending on your situation,” says Fitzgerald, who works with expats worldwide remotely from Singapore. “Things change all the time, so I would never advise someone to just go to a country, show up and think, ‘Oh, I’m going to be able to get a job.’”
In many cases, foreign governments won’t issue you a work visa unless you already have an offer of employment lined up, so give yourself time to job search and get hired by a company that will help deal with the paperwork for you. We know, that’s easier said than done. But the key is to highlight the talents you have that will be hard to find in the local market, Fitzgerald says. “What I do with my clients is help them understand their unique value and how to communicate that effectively and in a culturally relevant way,” she says. “[That way], companies can clearly see the benefits of investing in their unique combination of qualifications and skills that others, particularly local talent, just can’t offer." So research talent shortages in the countries you’re targeting and see where your skill set could fill a need.
One note: If you’re married, check to see what the local laws are about granting spouses work visas. Typically, an expat employee’s work visa does not extend to a spouse, and he or she would have to obtain one separately. And in some countries, your spouse may not even be permitted to work, according to Fitzgerald. “So one of the biggest challenges with families going overseas is oftentimes [they are part of a] dual-income household, and then they get an opportunity to go abroad but only one person is guaranteed work permission,” she adds.
2. Even if you’re just moving to a new home office, you might have to renegotiate your employment contract.
What if your job is with a U.S. company that is sponsoring and paying for your relocation abroad? Be sure to go through the terms of the contract with a fine-tooth comb before signing on the dotted line, says Jonathan Lachowitz, CFP®, founder of White Lighthouse Investment Management, which specializes in cross-border financial planning.
Make sure there are certain provisions in your contract, such as a clause that brings you back home in case you lose your job while overseas, protections that guarantee repatriation expenses once your contract is over and an allocation for an independent tax advisor, since your taxes will get complicated. Also, says Lachowitz, don't assume your employer's human resources department or the relocation specialists they’ve hired will have all the answers you need.
“Some relocation specialists are OK, but a lot of them get paid to make referrals, so [they may say], ‘Oh, go to this bank’ or ‘Go to this insurance agent,’” he says. “Do your own independent investigation. And find a colleague who made a similar move recently. You can learn a lot from other people who have crossed the border before you, and they can tell you what didn't go right on their move.”
3. You’ll have to be prepared to file two sets of tax returns.
Think filing your U.S. tax returns is a pain? Well, once you move abroad, your tax situation will get a lot trickier. “People don't realize the complexity of their tax situation [once they become expats]. They tend to think, ‘Oh, I just have a simple situation,’” Lachowitz says. “And they assume, well, hundreds of people must have the same situation, so how do they deal with it? [But] the facts and circumstances of each individual situation is different.”
What makes your taxes particularly complicated is that you’ll need to file local taxes in your new jurisdiction, which means learning the tax laws and regulations of your anticipated country of residence, says Lachowitz. But on top of that, you’re also still required to file a U.S. tax return — which means you may end up owing taxes back in the States, too.
The good news is the U.S. tax code does offer some provisions that can help reduce or eliminate the possibility of double taxation for expats. For instance, you may be eligible to claim foreign tax credits, or you may qualify for the foreign earned income exclusion, which allows expats to exclude paying taxes on a certain amount of their foreign income.
Of course, it’ll help if you get advice from local tax and financial planning pros, “because it can certainly be a shock to the system if you suddenly realize that your tax burden actually has been increased by taking on an overseas assignment,” says Marylouise Serrato, executive director of the expat advocacy group American Citizens Abroad.
4. You may have to change financial service providers.
The internet and mobile apps have made remote banking easier than ever, but that doesn’t necessarily mean you’ll be able to use the same bank, credit card providers or brokerages that you used stateside.
That’s in part due to foreign legislation that may prohibit U.S. banks and investment companies from selling their products across borders, says Serrato. “So when these institutions see they have an American who's no longer residing in the United States, they have concerns they could be violating foreign laws — and therefore they’re closing those accounts of Americans who cannot prove they have a residential address,” she adds.
On the flip side, the 2010 Foreign Account Tax Compliance Act (FATCA) is also causing foreign banks to hesitate taking on American clients. FATCA requires foreign financial institutions, including banks, insurance companies, stock brokerages and trusts, to report whether their clients are U.S. citizens. The legislation was created to detect offshore tax evasion by Americans, whether they live in the U.S. or overseas. Because of the reporting requirements, says Serrato, many foreign banks are now reluctant to deal with U.S. clients to avoid penalties or a potential U.S. Department of Justice investigation.
So before you go overseas, research the local banking situation and your ability to open a foreign bank account there or if your current U.S. bank offers expat services. Also, says Lachowitz, it might be a good idea to have at least two U.S. accounts — two bank accounts and two credit card accounts — just in case you suddenly find yourself with zero bank access in a foreign country.
5. Your retirement savings could be affected by an overseas move.
And what about your 401(k) contributions? “In some cases, if you're going overseas for a short period of time and you're working for a reasonable-sized company, they may keep you on an expat package that will enable you to continue contributing to your 401(k) plan,” explains Lachowitz. In other cases, you may not be so lucky and end up losing your ability to contribute to a 401(k) (as well as any employer contributions you used to get in the States).
In some countries you may also be required to contribute to the local retirement or pension plan, Serrato says, but that can bring up its own set of issues. Namely, those contributions may be considered tax-free in that jurisdiction, but may not be for U.S. tax purposes.
“Unless you happen to live in the U.K. or Canada, most foreign retirement plans can be subject to double taxation,” adds Lachowitz. “Or, at least, taxed in very different time periods — like in the year the contribution is made on the U.S. tax return, [but] at the time of distribution in the foreign country. So this is an area of great concern and great mystery to people.”
Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice, either in the United States or in any foreign jurisdiction. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.