US Tax Season and Effect on Expats

[Shilo 371]

We have had several threads that addressed the questions of moving from one state to another to get a state tax break. And I have seen it posted many times that guys will plan a trip home to the states around this time of year to touch base with their families, escape from the Songkran madness and file their taxes. But what I'm looking for is some help with tax planning...

 

Let's say that I have sold everything I own and just have a load of cash sitting in my accounts back home in the states. About 15% will be in taxable accounts while the other 75% will be in tax-deferred accounts, and 10% will be in a Roth growing tax-free. I won't have a job so there won't be any income to claim other then from my investments. For at least the first few years or so I will be living off of the taxable (15%) portion. And I plan to leave that money in money markets and short term CD's. The largest portion (75%) in the tax-deferred account will be invested but won't effect my taxes till I start to pull from the account. And of course the Roth is tax free so it will be invested with a 20+ year timeframe.

 

Looking at federal taxes... it seems that the only taxes I'll owe will be on the interest I'll get on the taxable portion. What do guys put on their tax forms for resident status (or does it even come up), do you show your address to be the mail drop in the states or your home in Pattaya? Does choosing one or the other have any effect on the standard deductions?

 

And most important: The standard deductions when you just claim yourself is about $8500. Let's say that the interest income from your taxable investments only comes to about $3000 for the year. Can we convert about $5000 from the tax-deferred ira to the Roth and add the 5000 to the 3000 and still stay below the $8500 (standard deductions) so we won't owe any money to the IRS?.

 

When looking at investing... growth is a good thing, tax-deferred growth is better, and tax-free growth is best of all. I'm wondering if I will be able to shift some more money into the Roth while living off the money in my checking account without creating a tax hit.

 

Shilo

(sitting here with a smile on his face knowing that he has survived his last winter)

[MrMango 672]

I assume that you mean that this is your last winter in the States - Good for you!

 

Your sub headline said 'Tax Season", but if you live outside the U.S., you get a automatic 180 day deferral of filing of taxes, so the season is late fall.

[sabang 0]

I am curious to know the attitude of US citizens here to the fact that, alone in the world, they have to pay US federal income taxes even when they do not reside in the US- subject to the annual exclusion of US$75K that is.

Just curious- I know the attitudes of my former clients, but that was a few years ago, and after all they were my clients.

[soi6 0]

Hi Shilo,

 

I've considered the same rollover from the traditional to roth ira. When you do so you have to pay taxes on the rolled over amount as though it is income, so that would add 5000 to your yearly income by doing this (taxwise). Also, depending on age you should be able to contribute added amounts to your ira/roth ira, and don't forget you could convert 5000/yr into a traditional IRA, which would decrease from your total income as a standard deduction - this can be added to the standard deduction taking you up to 12500 deduction, worth considering.. You can roll over $ into a roth ira and contribute to a traditional ira in the same year. So this is something to ponder.

 

I am planning to use relatives in an income tax free state as where I get stateside mail, and use the internet for as much as possible.

 

Before you do retire look into whether you have the 40 credits (1 credit is 1k/yr income and 4 can be earned in a given year) for social security qualification. Even if you worked the whole time look into it, a friend of mine didn't check and discovered he worked for a state company that didn't deduct for social security. so look into the 40 credits and doublecheck to ensure you'll get a check at 62 or higher if you opt for more.

 

no real way around shifting the cost of the conversion of traditional ira to roth.. Only way I can think of is if you also did a traditional ira contribution of the same amount you contribute in the same year, that would nuliffy the total tax amount down to zero (if the same for both).

 

Congrats, b4 u know it you'll be relaxing in Pattaya!!

 

Sabang - think it is higher now, in the low 90's. But this is only on foreign earned income from a job, not from investments etc.. Also the US congress removed many other writeoffs for working expats housing etc this last year. They will eventually get rid of the income tax avoidance I suspect. Yes, it really isn't fair that the US is one of the only (think in company with Libya) country to have its people pay taxes when they no longer live in their country....sucks..

[Shilo 371]

Sabang,

 

Just in my own case, I can't complain about the tax issues I'm facing with the US. For the past several years I have been socking away all that I could into my 401K and then another $5000 into my Roth. The majority of my "wealth" will be in retirement accounts.

 

So at the moment I am putting 20% of my pay into the 401K and because I'm over 50 I am using the "catch-up" limits to add another 10% for a total of 30%... then there is my company match of 5% and a year end profit sharing of another 10%. Without sharing my pay scale over the net, it's enough to say that nearly half of the money that I'm making each year is not being taxed at my current rate of 28%.

 

As I said, growth is good, tax-deferred growth is better, and tax free growth is best of all. I have "sheltered" a lot of income from taxes each year and will continue to shelter those monies plus any growth till I start to take it out of the accounts for income. And because I will no longer be working, then those distributions should be taxed at about 10 or 15%.

 

It was a deal that I made with the government that I was deferring the tax so I'll pay up when the time comes. But that won't stop me from looking for other ways to chase that best of all worlds... tax free growth. Which is why I'm looking to convert some of the tax-deferred money to tax free without having to pay the tax if I can keep my total income below the standard deduction by converting a little bit each year.

 

 

Soi6,

 

As you can see from above, I am putting every dime I can into retirement accounts. If there was any more room under any of the limits I'd be filling them too

 

No what I'm wondering is if I stop working and start to live off of money that I'll have in my checking account (mostly coming from a sale of my house) and so won't show ANY income except for interest on the money in the savings....and if I can convert small amounts of money from the traditional ira to the roth and not owe any taxes as long as the interest income and converted amount doesn't exceed my standard deductions?

 

 

And Mr. Mango,

 

Yep, this was my last winter here in the cold ass heartland of the US. But for the moment I'm still here in the states and for most of us the tax season ends on April 17th this year.

 

Also worth noting: there was a study done (actually, it's done every year) that says that Americans have to work nearly 4 months of the year just to cover all the different kinds of taxes... be it federal, state, local, sales, gas, ect ect ect ...

 

.

[BigDUSA 71]

I have no problem paying US taxes. I may be moving back to the US some time in the future if I don't like the expat life. I'm getting close to making the big move.

Edited April 8, 2007 by BigDUSA

[don_dadda 0]

if you are out of the country for 330 out of 365 you are exempt from income tax below a certain level. The law is a little more complicated than just that but that is the jist of it.

 

 

I am curious to know the attitude of US citizens here to the fact that, alone in the world, they have to pay US federal income taxes even when they do not reside in the US- subject to the annual exclusion of US$75K that is.

Just curious- I know the attitudes of my former clients, but that was a few years ago, and after all they were my clients.

The tax exclusion this year is 82k

[Owen` 2]

I am a little late to the party, but I'll offer my information:

 

 

Let's quote the scenario.

Let's say that I have sold everything I own and just have a load of cash sitting in my accounts back home in the states. About 15% will be in taxable accounts while the other 75% will be in tax-deferred accounts, and 10% will be in a Roth growing tax-free.

 

For at least the first few years or so I will be living off of the taxable (15%) portion. And I plan to leave that money in money markets and short term CD's. The largest portion (75%) in the tax-deferred account will be invested but won't effect my taxes till I start to pull from the account. And of course the Roth is tax free so it will be invested with a 20+ year timeframe.

 

The standard deductions when you just claim yourself is about $8500. Let's say that the interest income from your taxable investments only comes to about $3000 for the year. Can we convert about $5000 from the tax-deferred ira to the Roth and add the 5000 to the 3000 and still stay below the $8500 (standard deductions) so we won't owe any money to the IRS?.

 

I'm over 50 I am using the "catch-up" limits to add

 

 

Okay. This sounds first of all like you're about 51.

 

1) That means you have 8.5 years to fund your life to avoid the penalties of early withdrawl from your Trad and Roth IRA.

 

2) When you quit, it is highly likely that one of the first things you will want to do is roll your 401K into your Trad IRA. You do this to get the money under your own control (minor consideration) and to avoid 401K fees (major consideration, they are buried in the loads on the investment options). Your Trad IRA options will likely be cheaper than the 401K options. But check on that just in case your company is shockingly generous.

 

3) In general, you want your taxable portion of a portfolio to be in equities and your non taxable portion in fixed income. This is because "equities" should mean an index fund that generally only pay about 1.5% dividend yield (qualified). You will sell the fund as you need it for living expenses and that taxable event is a long term capital gain. In other words, taxes will likely be lower if you're parked in equities vs fixed income. In fact, for the next few years qualified dividends and LT Cap Gains at the low end of income are taxed at just about zero. This is the reverse of what you planned. However . . . .

 

4) If your taxable portfolio is going to throw off $3,000 in income, and you had planned for it to be in fixed income like CDs, then this sounds a lot like 60K (at 5%). That ain't gonna last you 8 years. But your question about doing $5K of Traditional to Roth conversions to get up to the standard deduction is legit and the answer is yes, you can do that. In fact, you may want to do more than $5K and eat the 5% or 10% tax that will exist for the next few years. Remember, the current tax rates are in great danger. They expire. We don't know what the mood of Congress will be when they expire so there may be merit in shielding as much as you can before those rates rise.

 

 

So. You are configured a bit awkwardly. Your net worth is grossly skewed to tax sheltered vehicles. Probably more so than most simply because of home ownership and the selling of that house. Because of this you have to think carefully about what happens at age 55 when you have to tap your IRAs and face penalties. Now, the Roth can be tapped penalty free if you had it for 5 years . . . something like that, do the research . . . but I anticipate issues if you try to tap it penalty free and simultaneously try to do Trad -> Roth recharacterizations. That will look like you're tapping the Trad, not the Roth and penalties for being < 59.5 would trigger.

 

Okay, that's my first draft input.