Costs of Moving Abroad - Taxes

Tax questions to ask before you leave

              If you have been considering the financial implications of a move abroad or you have happened to see a politician on the news comparing the relative freedom of US tax brackets to a random Scandinavian country you might be worried and/or curious about how much of a higher burden you may have. 

              Normally, when you encounter someone comparing taxes between countries the speaker is talking about income tax. For the most popular European destinations, a move abroad may result in an increase in your personal (national) income tax. But income tax is far from the complete picture when it comes to your personal tax burden. So here are a few important questions to ask yourself to help create a more complete picture:

First, does your desired destination have a tax agreement with the United States to prevent double taxation? The United States is unique in its citizenship-based taxation. Whereas nearly every nation taxes you based on your residency, the US imposes a tax burden onto all its citizen, regardless of if they live in country. This results in a dual tax burden for American citizens living abroad. Luckily, many countries have a tax treaty with the United States to prevent Americans from actually having to pay twice, but not every country does, so do check if your destination country does have a treaty. 

Another big question has to do with your state taxes. Many Americans live in states that have additional statewide income taxes, often large enough to bridge the gap between our national income taxes and the slightly higher national income taxes commonly found in Europe. If you are unsure of whether or not you want to keep a residence in the US, it is worth considering if keeping your American residence maintains your state tax burden.

On the flip side of this, while many European nations employ strictly national tax systems, some countries like Spain mix local taxes and national taxes. Make sure you know what kind of system your target country has and what that does your tax burden. 

Many people move as part of their retirement, but if you are still planning on working after your move you should know how payroll taxes and social security contributions are handled. That includes what the US’s social security agreement is with that country, and how many years you need to work in that country to be eligible for retirement benefits.

Estate tax is another tax that can vary greatly from country to country. While in the US there is an exemption for inherited assets with any surplus being taxed to the estate, other nations like France and Spain not only have a different threshold but also bill the recipient instead of the estate for any taxes owed. If you stand to inherit a significant amount in the future, check estate tax laws and their cousin, gift taxes, as some places like France allow for substantial gifts to be made tax free to incentivize families to share wealth sooner rather than later.

For those of us who previously immigrated to the US but now are planning on moving back home or to a new home altogether, check to see if you are required to pay an exit tax as part of your departure from the US. 

Finally, while going through this long list of expenses, it is worthwhile to check what you are going to be getting for your taxes alongside what the cost of living and of housing is compared to your current expenses. We have written more on that which can be found here. And above all else, remember money is just a tool to help you do the things that make you happy. If you can afford to move to a place that you believe will make your life more enjoyable, don’t get cold feet because you might pay a bit more in tax.