Thinking about retirement abroad? Before you make an offer on that can’t-miss beachfront property, you need to make sure that you’re familiar with FATCA—the Foreign Tax Compliance Reporting Act. FATCA was passed in 2010 and officially took effect on January 1, 2013, with various specific rules and regulations being rolled out throughout 2014. For American citizens and green card holders living abroad, FATCA has a number of implications, which it’s important to be aware of so that you can avoid getting into trouble with the IRS.
The Purpose of FATCA
FATCA was passed as part of the Hiring Incentives to Restore Employment (HIRE) Act. The goal was to prevent U.S. taxpayers from evading U.S. income taxes by investing in foreign accounts or holding offshore assets. FATCA strengthened reporting requirements for both individuals and foreign financial institutions (FFI) and imposes penalties for failing to comply with the regulation.
If you retire abroad, FATCA could make it difficult to open a bank account or obtain a mortgage.
What FATCA Means for Retirees Abroad
If you decide you want to spend your years of retirement or move abroad for another reason, you may find it more convenient to do some of your business with a local (non-U.S.) financial institution. If you hold assets with a FFI, you will be required to file a Form 8938 with your U.S. income tax return. Note: If your foreign financial assets total $50,000 or less at the end of the tax year, you are exempt from the reporting requirement that year.
FATCA also requires that FFIs report information on their U.S. taxpayer account holders to the IRS. Those who fail to provide this information could face a 30% withholding tax. Rather than deal with the headache of reporting information to the IRS, some foreign financial institutions are simply declining to work with U.S. taxpayer clients. However, may others have agreed to comply with the rules—more than 77,000 financial institutions will share information with the IRS, according to the Economist.
Of course, FATCA doesn’t just apply to Americans living abroad. If you hold a significant chunk of assets at a FFI, you’ll also be subject to reporting requirements and possible penalties, whether you live in Los Angeles or Lagos.
The FATCA Fallout
If your considering retirement abroad, FATCA could make it difficult to open a bank account, purchase insurance or obtain a mortgage in your new country of residence. Even if you can do business with a FFI, you may have to fill out additional paperwork and provide documentation so that the bank or other institution can provide accurate information to the IRS.
For some Americans abroad, particularly long-time expats who don’t intend to ever return to the U.S., FATCA has inspired them to give up their citizenship entirely. The number of U.S. citizens who renounced citizenship was nearly 3,000 in 2013, a 221% increase from 2012. But for many people, renouncing citizenship isn’t a viable or desirable option. These people will have to deal with the FATCA fallout.
What You Should Do
If you are considering retiring abroad, make sure you’re familiar with FATCA and any other tax issues that affect expats, like the Foreign Bank Account Report (FBAR). Don’t make the mistake of assuming that just because you don’t live in the U.S. you are exempt from paying U.S. income tax—that’s not the case. In fact, before you move abroad, it’s a good idea to talk to a financial advisor who is familiar with U.S. tax law and who has worked with expat retirees in the past (preferably in the country where you’ll be living). The extra work now may save you a bigger headache later.
By Chris Cooper, CFP®