Investing for Survival

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Three Tax Tips if You are Moving Overseas in 2014

By Nick Hodges

You’re considering an international lifestyle. You have a shortlist of overseas havens and you’ve set the date next year when you’re going to make the move. Along with your other research, thorough tax planning can help you save money and avoid hassle. Here are the three things I always talk through with prospective expats…

1. Leave from the “right” state: You could save a bundle on state income tax and avoid future harassment from state authorities by making your overseas move from a “no income tax” state. But you have to establish residency there before you leave the U.S.

When you move abroad from an income tax state, that state assumes that you are only temporarily away and you are still a resident of the state for tax purposes.

But there are nine “no income tax” states you can consider: Florida, Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Move to one of these before you head overseas and you can save significantly.

You can save on state income tax.”

You see, as part of the proof that you have permanently left a state, you must file a partial-year tax return there. And the only way you can file a partial-year tax return is to move to another U.S. state mid-year.

You also need to establish a domicile in your new state. It’s the state from which you leave that determines whether you have actually left permanently or temporarily. The only credible way do this is to leave a paper trail. Change your driver’s license and voter registration, sign a lease on a condo and create new wills and trusts. Transfer medical records to new physicians, open new bank accounts in your new home state and close all business and personal accounts in your old state. And keep copies of the termination letters and account statements.

Keep a folder with your plans, and receipts documenting everything. This is proof of your intention to permanently leave your old state. Establishing a credible history of new state domicile generally takes about six months and should encompass voting in your new state and filing a partial-year return with your former state before you leave the country.

2. What you need to disclose:

There are as many as six additional federal tax disclosure forms when you move abroad. While these forms usually don’t change your U.S. income tax amount, each form carries a minimum $10,000 per year penalty if not correctly filed. If it takes a few years for you to find out which forms you should have been filing, these penalties can quickly add up.

So better to know before you go. If you are involved in any of the following activities while living or working abroad, you will likely have additional disclosure reporting requirements and should consult a tax professional skilled in international tax.

• Foreign bank and financial accounts that reach a collective value of $10,000 at any point during the year. This includes accounts for which you are a signatory, but not an owner. (Foreign Bank and Financial Accounts (FBAR), Form 90- 22.1)

• Foreign financial assets totaling $50,000 or more, depending on your filing status. This includes foreign investments and foreign corporation ownership. (Statement of Specified Foreign Financial Assets, Form 8938)

• Your 10% or more ownership in a foreign corporation or foreign ownership of at least 25% in your U.S. Corporation, triggers a multiple of disclosure reports that need to be filed with your tax return. (Start with: Foreign Corporation Ownership, IRS Form 5471)

• Your ownership in a foreign partnership or limited liability company. (Foreign Partnership / Limited Liability Company (LLC), Information Return of U.S. Persons With Respect To Foreign Disregarded Entities, IRS Form 8865)

• If you move money into a foreign trust, or receive money from a foreign trust, you will need to file a disclosure form. (Foreign Trust, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, IRS Forms 3520 and 3520-A)

• If you internationally transport currency or monetary instruments over $10,000, you need to report it on a special form at the time of transport. (International Transport of Currency, Treasury Form FinCen 105)

3. Keep important documents safe and accessible:

Most of us keep our important documents in a safe deposit box or filing cabinet. Things like birth certificates, insurance policies, wills, deeds, tax returns and health records. But what do you do when you need those documents while abroad?

One solution is to scan and save your files to a USB or thumb-drive. And that’s certainly a great idea. But to avoid the hassle that goes with losing or damaging that device you can look to an online vault.

These days there are several outfits offering secure, online storage for your important documents and data, which you can then access from anywhere in the world. Simply scan and upload your documents. This also means that your tax advisor or attorney can access these as well. Two such services areOnlinevault.com, which offers unlimited storage for $17 a month, and Myvaultstorage.com where 2GB of secure storage starts at $1.99 a month.