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Moving overseas upon retirement -- Impact of state of residence in the US

I will be retiring in the summer of 2023 and relocating permanently overseas. I am currently in California, which does not tax Social Security benefits, but it does tax other retirement income. Is there a way to establish residency in another state that also does not tax Social Security benefits, and has a lower tax rate on other retirement income, but without actually living there?  I may return to the US on visits periodically, but will have no residence or domicile anywhere in the US after I move.

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@WebWiseWoman @Tonster521 @fffred  -- These replies are all quite interesting. Unfortunately, none of them have anything to do with the question I asked. That question, once again, is this:

 

Is there a way for me to establish residency in a lower tax-rate state in the US, even though I'm not living there and will be living on another country? 

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@TomA252131 wrote:

Is there a way for me to establish residency in a lower tax-rate state in the US, even though I'm not living there and will be living on another country? 


Yes, there certainly is. It seems that you have have to break both your residency and domicile from California before you move out of the country. So you will need to establish these in another state before you move. Nevada is right next door and has no income tax.

There's a lot of information available with Google or other searches. Some useful ones I found include:

excellent discussion:
https://www.greenbacktaxservices.com/blog/tax-for-expats-state-taxation/

laws for California:
https://govt.westlaw.com/calregs/Document/I28588990D46511DEB97CF67CD0B99467?viewType=FullText&origin...

general info

https://www.cnbc.com/2020/09/17/op-ed-what-us-expats-need-to-know-about-voting-and-their-tax-status....


establishing in Nevada:
https://www.leg.state.nv.us/division/research/publications/factsheets/residency.pdf

 

 

 

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Once I have moved, I won't have a residence or domicile anywhere in the US. If I do come back, it will only be for brief visits, and even at that, I won't be back more than once a year at the most. 

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Honored Social Butterfly

What is your (physical) address gonna be with the Social Security Administration?  How are you gonna get your payments abroad? 

 

It sounds like you want/need to have a physical address in the USA once you move abroad.  Why? That's the missing info. Why do you need any physical address here - where are you moving?

 

Taxes will follow you regardless - US Federal, Foreign (some countries tax these benefits) State if you have a US address.

 

If you want a state address [somewhere] you will have to establish a physical address, there - not a PO Box.  It needs to correlate to the SSA address which you have on file.  So that may mean you buy/rent a property or use somebody's else address like a relative or friend, neither of which would I do just because of the security and hassle.

 

There are numerous states that either have no income tax or some that gives a very substantial retirement income exclusion and most all income applies to that exclusion if one is over a certain age.

 

Personally, I think I would want to know how the foreign country which you are moving taxes benefits / taxes all income.

 

The Balance 10/24/2021 Can You Still Receive Social Security if You Live Abroad?

How to Deposit Social Security Benefit Checks

If the SSA is able to send payments to the foreign country where you plan to spend retirement, you have a few options. You can have the checks sent to that country, or you can have them deposited into either a U.S.-based bank account or a foreign account held in a country with an international direct deposit agreement.  Direct deposit is the fastest, most secure way to receive payments.

 

Filing a Tax Return

If you're a U.S. citizen or resident of the U.S., the IRS will still follow you around after you retire abroad. Your worldwide income, including up to 85% of your Social Security benefits, is subject to federal income tax.

 

You will need to file a U.S. Tax Return each year, and you may also need to file a state tax return. You also will need to report any non-U.S. bank and securities accounts to the Treasury Department each year.1

 

Even if you’re moving to one of the few countries without an income tax, such as Bermuda or the Bahamas, you’ll have to pay income taxes in the U.S. 

 

Don't Forget About Foreign Taxes

Even if you don't have any earned income, you will be subject to the tax laws of the country you're living in. That means you may have to file taxes there in addition to your U.S. return if you receive distributions from your 401(k), IRA, or pension.

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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@TomA252131 I am providing a link to a Social Security brochure that addresses some of the issues that affect your situation. https://www.ssa.gov/pubs/EN-05-10137.pdf If I copied and pasted the brochure correctly, take a look at the provisions governing federal withholding and taxes on pages 30 and 31. As I understand the provisions, you maybe subject to 30% withholding if you do not have a permanent residency in the USA. There are exceptions to that provision which depend on whether there is a tax treaty with the country. The 30% amount was established to encourage folks to file federal tax returns to get some of the money returned to them. Most folks are not  in the 30% tax bracket. I believe most States have similar provisions especially the States that  tax SS benefits and pension benefits.

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@TomA252131 

I guess you don't have anything to worry about with California state income taxes then. 

Social Butterfly

I'm sure this will read stupid on my part, but since I wish I could relocate outside the US, I'm wondering why you would not move assets with you when "relocating permanently overseas"?

 

Just a question...


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Phil Harris, actor and showman, to John Fogerty of CCR: “If I’d known I’d live this long, I’d have taken better care of myself.”
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@WebWiseWoman 

 

It's not a stupid question at all. It's very pertinent for anyone with the thought of "moving".

The rationale for not "cashing out" a US asset would be based on how that would be taxed on income taxes, etc. For example, IRA accounts are taxed fully as regular income when distributions are made. Generally the distributions are a small fraction of the account balance (the IRS publishes tables that define the "required" minimum distribution for each year based on the owner's age). And this leads to income taxes but of a magnitude that's not burdensome.

 

But let's say that I had cashed out of my IRAs (as suggested by the Vanguard agent). That entire amount would be a taxable distribution. And with all of that in one tax year the tax rate (and tax due) would be extremely high.

 

So instead my plan is to leave IRA assets in the US and just draw the RMDs (plus any additional I may need or want).

 

Each type of investment would undergo the same sort of review and determine if it's worthwhile to cash out or not.

 

There would be other considerations as well for someone leaving their home country for another. With the US as my own home country I have to consider that it's one of the largest markets (for stocks, etc) in the world and provides for more investment options and flexibility than does even Canada. 

 

Our liquid assets though will be held primarily in Canada.

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@WebWiseWoman Depending on the country, bank accounts may be insured by that country's version of the Federal Deposit Insurance Corporation (FDIC). If so, you need to review very carefully the provisions of such insurance especially the amount of coverage. Also, will that country's government or Treasury bail out that insurance scheme in the event of a banking collapse as we experienced in 2008 -2009. Some folks do not know that the U.S. Treasury via the Troubled Assets Relief Program (TARP) saved the U. S. Banking system after it appeared the FDIC was underwater. 

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@TomA252131 

ahoy, Tom. I don't have any firm insights for your situation. But I am in a similar place, a bit further down that road. Last year I moved to Canada as a legal Permanent Resident. The US is my birth home and citizenship, my wife has Canadian citizenship (as well as US) and we decided to move there upon our retirement.

If I had fully realized all the financial and related complications this has presented I might never have gone through with this. But "your mileage may vary", especially depending on what country you go to.

I did not give too much thought in advance to my state tax and residency (and this may affect rights to vote in national elections as well). We moved from Florida which has no state income tax so this was a moot point.

Trying to find information on the actual costs involved in emigrating and settling can be quite difficult. I needed to make arrangements for all our financial accounts:  checking, savings, credit cards, taxable investment accounts, and retirement accounts such as IRAs and Roth IRAs. Some firms said they would not work with us if we did not have a US residency. RBC bank and Chase Bank had no problem with maintaining our bank accounts and credit cards with Canadian residency; but Capital One 360 (with our primary checking account) would shut down the accounts if we did not have US residency...and I was initially given misinformation about this, told "no problem!" but it became a problem when I tried to change our address.

 

Even worse was dealing with the Vanguard Fund company: initially I was told that I would have to close all our Vanguard accounts (I was even given entirely incorrect advice on how to do this, which if I had followed such advice would have cost a few hundred thousand dollars in income taxes), after some back and forth they said that our retirement accounts could be maintained but not taxable accounts; and the retirement accounts could not have any other transactions than withdrawals (so, no rebalancing of funds, etc). This was very disappointing, but eventually in light of other options and impediments it "didn't seem so bad after all!".

 

Similar issues were encountered with other investment companies. Eventually Fidelity seemed to be a reasonable choice so I have moved some funds to Fidelity and will likely move more over. Due to the securities laws in Canada many US brokerages are leery of having clients in Canada. Of course, that is Canada and your country of choice may not present such problems.

 

My American Express credit card was another problem. Amex claims they will work hand in hand with their card holder to move the account to another country...I found this to be a very tedious and lengthy process. In the end I question whether it was worthwhile (I reluctantly think "yes, it was").

 

Just a couple weeks ago I changed my US pension direct deposit from Capital One 360 to RBC bank...I had considered having both this and my Social Security sent to a US dollar denominated account at my Canadian bank (I would do the currency exchange myself through a forex company, I would not use the bank's own exchange due to their high cost). But I noticed that the pension could not be sent to a bank outside the US (this may not be so for all pensions) so I went with my RBC bank. On the other hand, Social Security will happily send your checks to foreign banks in any number of countries (check their site, there are rules on what countries are good and those few that aren't good, and a number of other rules on receiving SS while resident outside the US).

I mentioned "forex", exchanging US dollars for the foreign currency. A couple months ago I had to quickly move $250K from Vanguard to my Canadian bank for a home purchase. I was REALLY FORTUNATE that Capital One 360 let me do wire transfers "on line"...many banks don't, but the limit was $50K per 24 hour period. So I had to make 5 separate wire transfers over the course of 5 business days (actually 6 or 7, as I missed some of those 24 hour periods by like an hour or so). That was incredibly stressful, though this is a "one time" occurrence. (actually, not for me as we sold our house in the US and soon I have to move the proceeds to our Canadian bank and I know that will be very stressful, I am looking at more expeditious ways to do this).

 

And there will be ongoing forex transactions for the regular routine income of pension, Social Security, IRA distributions, etc. 

 

Really, it's like a full time just to keep up with some of this.

 

Oh, and income taxes? The US expects US citizens to file tax returns (and pay income taxes) no matter where you live in the world. In fact it is for this reason that some high rollers actually renounce their US citizenship (and pay taxes) but this is not a trivial venture.

 

And Medicare? I am maintaining, for the moment, my Part B but I dropped Part D. Part A is "free" for most people so there's no real need to drop that. But I will likely drop my Part B soon. Not that Part B is going to cover anything for me while resident in Canada.

Well, these are some of the issues you may want to think about and there are many more. There are plenty of forums and sites that provide advice to expatriates.

I might suggest a trial period where you spend 6 months in your target country while maintaining everything status quo in the US. If it goes well then you can start the processes that I've been going through. 

Good luck!

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Honored Social Butterfly

Whoops ! 

Sounds like you needed a lot of spread sheets for all of that - I had no idea of the complications.

As far as your Medicare - just make sure you are never gonna move back and need Part B / Part D again - the premium penalties will be a big amount.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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@GailL1 wrote:

 

Sounds like you needed a lot of spread sheets for all of that - I had no idea of the complications.

 

As far as your Medicare - just make sure you are never gonna move back and need Part B / Part D again - the premium penalties will be a big amount.

 

Yes, Gail, I have a ton of spreadsheets. lol.

 

I have considered Medicare B/D but thanks for pointing this out as it is something people need to consider. I was prepared to maintain Medicare B/D for the first year or two, just to make certain things go well here. And I'm prepared to cancel them and then end up paying the additional premium should I ever go back to the US (my wife is not yet of Medicare age). If I remember correctly (and if I understood correctly the first time around) it's a 10% increase in premium for each year that I hadn't paid into the Medicare system. So that's something that I (likely) wouldn't find onerous.

 

 

 

 

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Honored Social Butterfly

Timing is everything so you might give yourself a little wiggle room if this is ever the case.  Just more "gotcha" Medicare rules.

You would also have to use the Special Enrollment Period; meaning, you would have to sign back up for Part B between 01/01 - 03/31 but then your coverage would not begin until July.

 

Better make a spread sheet for re-entry.  😩

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
Bronze Conversationalist

@fffred Another subject that needs review is whether or not the country has a tax treaty with the USA. If not, IRS Regs. generally require 30% federal withholding for various sources of income (i.e., social security, pensions, etc.) Dividends, capital gains, etc. may have different withholding percentages. So, a person may be tying up some monthly income during the calendar year. 

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