Sunday, December 5, 2010

Financial Issues

Note: nothing I describe here should be considered accurate. I say that to ensure that you research this information for yourself. The various laws involved are often convoluted (impenetrable in the case of the US) and I am not a lawyer. This is not legal advice.

Most expats I know haven't moved to another country to earn more money. Some will earn more money, some will not, but mostly they're going for the chance to live in another country. Had I been focused solely on money I would not have moved to Nottingham, UK several years ago. I was paid reasonably well, but I would have made a lot more money going to New York City, even counting the cost of living.

My Money
Imagine a world without ...
Photo by Marco Papale
Even if we're not in it for the money, we can't completely ignore the financial implications. While I can't address the particular financial situation you will be in, there are some general things you'll want to be aware of.

Americans and Taxes

Short description: if you're a US citizen and not earning a large amount of money overseas, you must still file a tax return, but you probably won't owe any taxes. As a general rule, if you are an American living and working overseas, you can earn up to around $90,000 US in a foreign country before having to pay any tax back to the US. I'm not providing a link because the US Congress has changed this a number of times and keeping abreast of these laws is like skeet shooting while running. You need to do your research and and hire a tax professional. If you want to understand how the IRS taxes US citizens abroad, good luck.

That was the good news. Here's the bad.

Antigua Yardsview
Antigua: The IRS
wants this money
Photo by Infrogmation
Congratulations USA! You're one of only three countries which is still regressive enough to tax your citizens overseas. Others, such as the Philippines, are decent enough to tax their expatriate citizens on Philippine income (in case you're wondering, the other country which taxes citizens living abroad is North Korea). If you're a US citizen, however, you'll find that you can move to Antigua, live there for 40 years, earn all of your money from Antigua, never leave the country, and still be liable for US taxes. If you don't like this and decide to take the extreme step of renouncing your US citizenship, the US Internal Revenue Service can decide to levy taxes against you for up to 10 years after you're no longer a US citizen! As far as I know, this makes the US the only country in the world which imposes income taxes on foreigners living in other countries. In an effort to chase alleged tax dodgers, the US is now trying to force foreign banks to comply with US laws, the result of which is some Americans are finding that foreign banks won't even open accounts for them. I haven't had this happen to me, but be forewarned!

The situation is insane enough that I know of one gentleman who has, for reasons I won't go into, dual US/UK citizenship. This gentleman was born in the UK, lived his entire life in the UK and worked exclusively for UK companies. In contacting a lawyer about a potential residency issue in the US, he discovered that he owed tens of thousands of dollars in back taxes to the US, a country he had never lived or worked in! Unfortunately, US expats have no significant political power and politicians can safely hammer us to fight for votes at home.

Tax Benefits for Expatriates

Wanna work in Denmark? You've probably heard about the high taxes, but what about only paying 25%? Denmark, like many countries, wants to attract more skilled labor and thus offers nice tax benefits. Or consider the Netherlands where I live. They offer something called the 30% ruling. What this does is effectively lowers my salary by 30%, but I get reimbursed that 30% tax free. This is to offset the costs of me, as skilled labor, moving the the Netherlands. Not everyone qualifies for this, but if you do, the 30% tax ruling effectively caps your income tax at 36.4% as opposed to the normal 52% top marginal rate (note that the 52% rate is only on income over about €55,367 a year, thus limiting it to those who can afford it).

Big Corn Island Nicaragua Beach
Big Corn Island, Nicaragua
Photo by
Other countries are even more generous. Fancy Nicaragua? Nicaragua is one of many countries which does not tax the expatriate's foreign-sourced income. MSN Money and others are referring to Nicaragua as one of the best retirement spots in the world.

You should do your research, but be aware that many of these laws change frequently, changing with the prevailing political whims which often have little to do with reality. Even if you're not doing this for monetary reasons, you still need to pay attention to the laws. You really don't want to get back to the US to find you owe several years worth of taxes (though in reality, you will likely owe nothing).

High Taxes In Foreign Countries

As a side note, I really need to address the high taxes in many foreign countries, particularly Europe. The US has often set its highest marginal tax rates well over 80%, even during the 1950s, a time of economic prosperity (yes, I know about the Marshall plan and its impact). In fact, since 1932, it wasn't until 1987 that the highest marginal tax rate dropped below 50%. So why aren't Europeans rioting over their taxes? Because in general they get better health care, free or very inexpensive education, more vacation time (I get five weeks this year), a better safety net if they're out of work, and many other benefits. They do this while generally remaining competitive in world markets and enjoying very high standards of living. If the only thing which mattered was the tax rate, Europe would be a poor destination. Fortunately, it's how much everything else costs and what benefits you get from it. European cities almost always dominate the lists of the best places to live and European citizens are generally far happier with their quality of life than others. If you think the taxes are everything, you're being pretty short-sighted.

Changing this situation

If you're a US citizen living abroad, may I suggest joining Democrats Abroad or Republicans Abroad and trying to help make our voice heard?

Update: April 7, 2012. It turns out that only the US and Eritrea tax their citizens abroad and the latter's tax scheme is little more than extorsion.


  1. Out of interest, what if someone is born to US/UK parents? Is that child "liable" for tax if they don't file a tax return every year?

  2. @almostwitty: I am not a lawyer, but it's my understanding that once you have the US citizenship, you're liable. Thus, a child born in the US of US/UK parents should automatically have US citizenship, while one born and raised in the UK should have to claim when they come of age, making them liable for said taxes.

    I'd have to do a lot more research to be sure and that information may not be correct, but I believe it is.

  3. This post reminds me of Palin's take on where the US and North Korea sit with respect to one another ("Our North Korean allies..."). I thought we had nothing in common; apparently I was wrong.

  4. I looked up the Danish law and did the currency conversion:
    "the monthly pay for key employees must be at least DKK 63,800 (2010) after deduction of ATP payments, labour market contributions, special pension savings and any obligatory foreign social contributions..."

    That's 11,000$/mo. I don't make that much money. Nor do I know many that do (I only know one).