Unlock tax-saving opportunities and avoid pitfalls with our expert guide for American-Asian retiree couples.
For American-Asian mixed nationality couples, understanding the tax implications in the United States and the Asian country of residence is crucial. The U.S. taxes its citizens, Green Card holders, and residents on their worldwide income, meaning American spouses must file tax returns with the IRS even when residing in Asia. It's essential to be aware of the filing requirements, including the need to report foreign financial accounts through the FBAR and Form 8938 and the potential for double taxation.
Moreover, understanding the resident country's tax system is just as important. Each Asian country has its tax laws that can affect retirement income. Couples must navigate the intricacies of both tax jurisdictions, which often requires professional guidance to ensure compliance and optimize tax outcomes.
To mitigate the burden of dual taxation, American retirees in Asia can take advantage of the Foreign Earned Income Exclusion (FEIE) to exclude a portion of their foreign-earned income from U.S. taxes. The Foreign Tax Credit (FTC) also allows them to reduce their U.S. tax liability by taxes paid to the foreign country. Strategic use of these provisions can result in significant tax savings, but they must be carefully applied within the bounds of IRS regulations.
However, FTC is difficult for normal couples to understand. Depending on your situation, we recommend that you consult a professional to determine how much FTC you can use each year.
Retirement income can come from various sources, such as pensions, Social Security, and investments. Each of these can be taxed differently depending on the laws of the U.S. and the Asian country.
Some Asian countries may not tax pension income from abroad, while others do. A strategy to minimize taxes on retirement income may include structuring withdrawals to take advantage of more favorable tax treatment or timing them to coincide with lower overall tax rates.
For instance, Roth IRA or 401(k) distributions can be taxed under the resident country's tax system. If they get taxed, your past retirement strategy becomes worthless. Consider cashing out before your move.
A Green Card holder will lose their Social Security benefits if they move to a resident country without a Social Security Agreement between the resident country and the U.S. The benefits only last six months after leaving the U.S. On the other hand, if the resident country has a social security agreement, such benefits can generally continue. Please note that a Social Security Agreement is different from a tax treaty.
Understanding the tax treaty and Social Security Agreement, if one exists between the U.S. and the Asian country, can also provide pathways to reduce taxation on retirement income. Proactive planning with a tax advisor can help retirees navigate these complexities and potentially reduce their overall tax burden.
Estate planning for mixed-nationality couples can be complex due to differing inheritance laws and tax implications in the U.S. and Asia. To protect assets and ensure they are passed on according to the couple's wishes, it's necessary to consider creating valid wills or trusts in both jurisdictions. Additionally, understanding the U.S. estate and gift tax rules, as well as any estate taxes that the Asian country may impose, is essential to optimize the transfer of wealth.
Remember that the US lifetime exclusion of gifts and estate tax amounts is comparatively very high. Thus, your US assets may be subject to hefty inheritance taxes in the resident country. If you decide to stay in the US, such taxes may be avoided.
Another noteworthy story is that Japan now taxes US social security survivor's benefits as an inheritance tax under its law. Suppose an American spouse passes away, leaving their social security survivor's benefits. In that case, such present values may be subject to inheritance taxes, which may reach 55% with a minimum exclusion amount. On the other hand, Japan does not tax survivor's benefits annual income under their income tax regulations.
Strategies such as gifting assets before your move or setting up specific trusts can be beneficial. It's crucial to seek the advice of estate planning professionals proficient in cross-border scenarios to tailor a plan that minimizes tax liabilities and aligns with the couple's objectives.
Another important consideration is the special US tax rules for abandoning a Green Card and US exit taxes. If non-citizen spouses are not careful, they may be subject to US exit taxes and hefty penalties for not filing a required tax form, such as Form 8854. Many non-citizen spouses with a Green Card need to learn the requirements, and they are subject to additional taxes and penalties once the IRS discovers them. It is a lot better to know about the requirements while they live in the US rather than after moving out from the US.