A Beginner Lesson on International Taxes
You know how the saying goes… “The only certainties in life are death and taxes”. Although this may sound macabre, it’s the truth. And unfortunately, escaping to retire in another country doesn’t get you out of these truisms.
Today we’re going to open the discussion about taxes, more specifically International taxes. If you’re already living in your retirement paradise, you’re likely already aware of these points and perhaps wish you’d known some of this information when you first made the move. If you’re still in the planning phase of your overseas retirement, you’ll want to read this to avoid additional stresses at tax time.
The majority of countries are somewhat tax-friendly with retirees. Typically, they won’t tax your pension or Social Security locally. Just keep in mind; if you’re American, you may still be obligated to pay taxes back home on your retirement income. Taxes that you pay in your new International home must always be kept separate from any obligations you have to the ‘tax man’ back in your home country.
For example, if you’re American and you’ve retired to Belize, you won’t be required to pay taxes on your pension income in Belize, but you could owe tax on it in the USA.
The thing is, if you’ve moved to your new locale to simply retire and enjoy life, then tax planning is a non-issue for you. If you’ve done your research and are living in a tax-friendly country, you essentially have no worries.
Things get a bit more complex if you are receiving income within the new country you’re living in. Whether you’re receiving money from investments, are working for someone or own your own business, you’ll have income to report and taxes to pay.
One of the most important things to remember is that your tax responsibilities vary based on several criteria, one of them including the country and even area within that country that you’re living in. In addition, your nationality, residency status, the type of income you’re receiving and where that income is coming from are all points to keep in mind.
If you’re an American though – we can’t stress this enough – you will always be required to file a tax return back home. Even if you don’t owe anything, as long as you maintain your citizenship you’ll always be tied to Uncle Sam. If you’re Canadian, it’s a little different. Canada’s tax agency (Canada Revenue Agency - CRA) will fit you into one of four categories – Factual Resident, Deemed Resident, Non-Resident and Deemed Non-Resident. There are different tax obligations for each category, with the exception of Non-Resident and Deemed Non-Resident, both of which follow the same tax rules. If you’re retiring abroad from Canada, it’s a good idea to have a discussion with the CRA to confirm where your sit.
There are some countries that tax their foreign residents on a remittance basis. Basically, they expect their cut from any money you bring into their country. If you’re able to live on a minimal amount, this can work to your advantage. As long as you keep your money outside of the country you’re living in, you wouldn’t be required to pay any local taxes.
Alternatively, there are some countries that only tax foreign residents on money they’ve made locally. So if you’ve got a hefty nest-egg that you want to bring with you to your new retirement home, you can do so without worrying about being taxed on it in your new home country.
The three countries in Latin America where this is allowed are Belize, Panama and Uruguay. As a foreign resident in either of these countries, you won’t pay any local taxes on your pension income or any other type of income (investments, business transactions, etc) that are received outside the country. So… theoretically, if you live in one of these three countries and continue receiving an income from your business in the US with US clients, you will owe zero taxes! Not a bad gig. Of course, you’ll still be required to file your taxes in the US.
Overall, unless you’re an accountant or earn your livelihood in the tax world, tax talk is one of those topics that can clear a room or cause an uproar, depending what kind of circles you travel in. Unfortunately, no matter how long you try to put them off, they will catch up with you and typically be worse to deal with the longer you wait. Doing your homework and making sure you know what you’re required to pay and to whom when you relocate abroad can save a world of headache. Plus, it may not be as bad as you had imagined!