International moves are incredibly complex. There are many moving parts and one of the largest and most complex is tax. The United States is one of two (the other being Eritrea) countries that requires their citizens to file income taxes even when abroad. If you don’t work for a multi-national corporation who is willing to pay for your tax services and provide tax equalization, it is very possible that it would be too much of a financial burden to live abroad.
Although you can certainly file your own taxes, I would recommend using a tax services that is familiar with expat taxes, especially if it’s your first year. International tax services from a Big 4 Accounting Firm are sometimes included in expat packages. There are also smaller boutique agencies that have more reasonable service fees.
Tax equalization is another important part of any international move package. The goal of tax equalization is to ensure that US citizens who work abroad are not being double-taxed on their income. Corporations who offer tax equalization pick up any differential to make sure that their employee is tax neutral. Because of the complexity of US Taxes, American citizens abroad who are not sponsored by a corporation who includes these benefits have renounced their US Citizenship. According to the US Treasury, in 2015 there was a 20% YoY increase of US Citizens who gave up their US Citizenship.
As if that is not already complex, add in the Foreign Account Tax Compliance Act (FACTA). According to the IRS, the objective of FATCA is to require the reporting of foreign financial assets. The intention was to require US Citizens who live in the US and who have offshore accounts to report their overseas financial assets so that they could be taxed. One of the residual effects of this is that US Citizens who are living and working abroad also have to report any income that is in a foreign bank account. This has caused a lot of issues for American’s who need to open up a foreign bank account. Banks must now report all financial assets of any US Citizen customer. This means more paperwork and bureaucracy for the banks. The result is that less banks are willing to allow US Citizens to open bank accounts.
The US also does not recognize certain income as retirement income. In our case, B will receive a pension that both his company and he will pay into. Since it is not recognized as retirement income, B will be taxed on his pension. This is referred to by the IRS as the Taxation of Foreign Pension and Annuity distribution.
As you can imagine, the tax piece of this move has been the most stressful. It’s incredibly difficult to financially plan for a situation that we have never been in and barely understand the nuances of all the US tax laws. There are many tax credits that we will most likely be able to take advantage of to make us tax neutral but that involves working with an international accounting firm to help navigate this incredibly complex world.
This is really only a very high level summary of some of the tax issues an expat may run up against. It becomes more complex based on your assets, income, and even business travel schedule.