The fantasy of renouncing the hustle, bustle and frenetic exhausting energy of the rat race existence in the United States for an idyllic life at an easy pace in a sun-kissed climate abroad is alluring. It isn’t hard to picture clear blue seas, beautiful people, cold tropical drinks, and other trappings. For some this will only ever be a fantasy; for others it can be a reality. But, unless you have planned for this moment, you might soon find yourself in worse trouble financially than you ever were stateside.
Living life as an expatriate can be done successfully, but there are many pitfalls. When it comes to financial literacy and demographics, expatriates run the gamut from older people who worked for years and have retired, to young and middle-aged people who have compiled large sums of money through savings, inheritance or winnings. And of course, let’s not forget the ever-increasing trend of remote workers who have the location independent freedom to live and work anywhere in the world.
Regardless of how it happens, it cannot be stated strongly enough that if a successful life outside of the United States is the goal, the financial side of things has to be done right. Expat financial mistakes can be very costly.
Nora’s Note: As a Canadian, I’m not fully familiar with financial regulations and requirements for U.S. citizens. So I’ve asked Marc J. Strohl, CPA, to write this article. He is the founder and managing director of Protax Solutions, one of the largest and most trusted companies specialized in expat tax services. He is a leading expert in the taxation of individual U.S. expatriates and/ or foreign nationals. A member of the American Institute of Certified Public Accountants (AICPA) and the New York State Society of Certified Public Accountants (NYSSCPA), Marc has published articles in many critically acclaimed publications including Thomson Reuters’ twice-monthly newsletter publication Practical International Tax Strategies.
Top 4 Expat Financial Mistakes
The following are four examples of expat financial mistakes a U.S. expat should avoid at all costs.
1. Doing Nothing at All
Expatriation is not a simple process. This is never truer than when navigating the financial obligations and responsibilities of life as an American citizen living abroad. Expatriate financial responsibility is complex and exacting, and can be so intimidating some people may be overwhelmed and freeze like a deer in headlights. Anyone who has ever seen what can happen to a deer frozen in headlights knows it doesn’t usually end well. Expect a similar outcome when an expat opts to take no action at all in terms of money management and U.S. tax compliance.
In terms of taxation, procrastination can happen for several reasons or any combination thereof:
Fear – Expats who have been gone a while without tending to financial matters may be afraid that they have reached a financial point of no return, and that their finances or tax situation may have grown far beyond their ability to contain the damage or do anything about it. The impulse to live in denial and just not think about it, hoping the problem will go away may be very strong. Unfortunately, not thinking about financial obligations will only make their money go away, not their obligations.
Ignorance – Some have no idea that as a U.S. citizen living abroad, they still have a legitimate obligation to file a United States tax return. They may believe that since they are living abroad and paying tax to that country, there is no reason to report their income to the U.S. government, much less pay a portion of their income to Uncle Sam. By the time they realize it, they could be in for a very rude and expensive awakening.
Rebellion – Contempt for the system may be the very reason some people leave the U.S. and they may consider taxation, particularly from a country they no longer actively live in and whose authority they may not recognize, a form of theft. These people will staunchly refuse to pay their tax obligation regardless of all other factors, even though they may be responsible regarding other financial matters.
In all these cases, things end more or less the same way: badly. Ultimately the Internal Revenue Service will find them; they are very good at finding non-compliant American expats. Once located, the IRS can turn their liberated expatriate dreams into a waking nightmare of financial anxiety and excruciating, nest egg draining assessments and penalties. Don’t let this happen to you. Find a proper online service that specializes in tax advice for U.S. expatriates and get the help you need to avoid this all too common trap.
2. Severing Banking Relationships
Believing that their time stateside is done, some expats may think it’s okay to no longer maintain any sort of physical address there, or to close their banking accounts and credit cards in good standing. This is a bad idea for a number of reasons.
When a physical address isn’t maintained, accessing one’s bank account can be very difficult, as can re-establishing credit when and if the expat decides for whatever reason to move back to the United States. For this reason, it is advisable to keep some sort of mailing address on file; a virtual mailing service, a relative, or even a close and trusted friend. This allows a correspondence lifeline back to the U.S., even if most banking is done by smartphones in the present day.
Closing bank accounts and credit cards in good standing is another move that can come back to haunt an American expatriate. Closing a credit card in good standing can hurt one’s overall credit score. It is certainly not necessary to maintain every single card, but keeping a home currency credit card for domestic purchases would be wise, even if there’s a yearly maintenance charge to do it. Care should also be taken to alert card issuers and banks about relocation in plenty of time for them to update their files and know not to issue red flags once card and banking activity begins in another country.
Learn how to maintain a physical residence address by using a Virtual Mailing Service
3. Living Above One’s Means
Being a newly arrived transplant in an unfamiliar country can be a thrilling, liberating experience. Everything is fresh, new, and exciting. It can be a time of renewal, and even rebirth, as we shed personas we’ve worn all our lives and reinvent ourselves as the person we may have always wished we could be. It can be very easy to start spending extravagantly to help construct this new character. If the country is a low tax nation, the impulse to spend can be even more intense. From flashy new clothes and expensive dinners, to electronics, furniture, and even automobiles, spending can grow out of control with a shocking speed if not curtailed. Getting caught up in an unsustainable lifestyle can derail an expat utopia, so spend wisely and track finances carefully.
Nora’s Note: Great advice! Learn about creating a sustainable budget for your life abroad.
4. Having Too Much or Too Little Health Insurance
This is a big one. Failing to properly establish an appropriate expat health insurance plan can prove disastrous to the expatriate experience, should a serious injury or accident occur. Health care is expensive (depending on the country), and paying out of pocket for healthcare can drain funds extremely quickly if not managed with care and attention to detail.
Not having enough insurance means high deductibles and essentially paying out of pocket for all procedures. Too much insurance may translate to paying twice as much for unnecessary coverage when more appropriate levels could be found elsewhere. Examine your options exhaustively, paying special attention to international health insurance policy alternatives and properly vetting the selected insurance companies for legitimacy and best coverage for the money.
Carefully research the plans available, taking care to remember that less expensive plans may not provide the coverage needed or additional coverage that may be specific to certain countries. Even if a country offers subsidized or free health care, this may not be applicable to foreign nationals. Have an understanding beforehand of what visa or residency status means in that country and adjust health insurance expenditures according. This is one area where not getting it right can shatter an expatriate’s dream of a comfortable life abroad.
One Final Word of Advice
Don’t let the inevitability of making small expat financial mistakes dissuade you from finding the life you want. Just take care to learn from those mistakes, and try to never make the same one twice. A life abroad can be yours but it doesn’t happen by accident; it takes planning, commitment, and even courage, but it can also be one of the most rewarding experiences of your life.
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