Households of FI-Matt &Megan
Video Highlights from Today's Show
Video 1: FI as an American & UK Citizen
Video 2: Investing Abroad
What You'll Get Out Of Today's Show
- Matt and Megan are a dual military family on the path to FI. Matt is serving in the UK Royal Navy and Megan is serving in the US Navy, making their tax situation unique.
- Currently, they plan on having Matt get a green card, allowing him to work in the US, while Megan finishes out her Navy career to earn a pension and then move abroad in about seven years.
- Once Matt gets his green card, he will be taxed like any other US citizen. He owns an apartment in the UK that he would like to sell. Dave McKeegan notes that since there is no wealth tax in the US, Matt will not be taxed on his assets, but once he gets a green card or meets the substantial presence test, he would potentially have to pay capital gains tax on the sale of the apartment so it would be best to sell it first.
- Due to the Foreign Account Tax Compliance Act (FATCA), every bank around the world is required to report US citizen account information to the US Treasury Department. US citizens are also required to report accounts on a FinCEN 114 form and assets held overseas are subject to capital gains taxes.
- Dave wanted Matt and Megan to be aware that mutual funds held outside of the US can often be viewed as passive foreign investment companies. Any investments overseas should be US compliant as well. Vanguard has a number of retirement funds that report correctly to both the US and UK and are exempt from taxes.
- Matt and Megan are interested in how the can best take advantage of the US tax system and simplify it for themselves. To reduce their taxes, Dave advises Matt to physically give up his green card once they move abroad so that they can place money in international investments under Matt's name and he won't be taxed like he is a US citizen anymore.
- As long as their assets are less than $2 million, leaving the US will not trigger an exit tax.
- Depending on income, where their assets are held, and if they have children, their US tax filing status may change to take advantage of higher exemptions, but they should sell the UK property before filing “married filing jointly” as long as he doesn't already meet the substantial presence test.
- Matt may qualify for a tax-free UK pension when he retires from the Royal Navy but if he has a green card, he will need to pay US taxes on his pension until they move overseas and he gives up the green card.
- Dave McKeegan has moved around the world and is currently living in Costa Rica. Costa Rica is one of a number of countries that only tax sources of income earned within that country. As his business is located in the US, Dave pays US taxes. If Matt and Megan were to move to a country with tax laws like Costa Rica, they would not pay income tax to that country on their UK and US pensions.
- Other countries have income tax rules that depend on how much time is spent in that country. So it's possible to slow travel or split the time spend in a few countries and not pay income tax to the countries visited.
- Countries that tax their citizens living abroad are the United States, Eritrea, and North Korea.
- While there may be tax advantages to living abroad and giving up US citizenship, Dave has decided that he benefits of retaining citizenship far outweigh the benefits of not paying taxes and the risk of not being let back into the country.
- Wyoming is an easy state to incorporate a business and there's no state income tax. If also living outside of the US for 330 days a year, you can be eligible for the foreign income exclusion and exclude $100,000 of income from taxation.
- Alternatively, Matt could set up an online business overseas and pay Megan a salary up the foreign income exclusion amount and also avoid self-employment taxes.
- Living in Costa Rica, Dave's children have been learning through a combination of the local international school, homeschooling, and the Simple StartUp entrepreneurial program he's been running for a home school group. He is able to have conversations about business and money with his kids about money and they have become interested in investing as well.
- Though Dave and his family primarily rented homes while moving around the world, the rental market in Costa Rica made conditions more advantageous to buy. When they travel back to the US for extended periods, they can rent their home in Costa Rica out.
- Diversification doesn't just apply to a stock portfolio. You can be diversified in passports, income streams, and properties from other countries. Spreading your bets around different countries can make sense.
- Dave discussed some of the issues expats have opening local bank accounts as US citizens. Matt and Megan have been using Revolut to more easily move money around between countries.
- Opening up a Roth IRA is something Dave suggested Matt and Megan could do to stash away some tax-free money and have ready access to the principal later.
- Health care coverage overseas was another area Dave suggested they look into, although health care is frequently more affordable overseas. International policies are always an option to look into as well. The policy Dave has for his family cots $7,000 a year and provides coverage everywhere except for the United States.
- Another helpful tip Dave has for expats is to always have a couple of different bank accounts to avoid issues with expiring cards or the need to access larger amounts of cash.
- Opening and using US credit cards and travel rewards is also possible overseas. Dave uses a company called Mailbox Forwarding to receive and scan his mail.
- It can be a hassle to try and say you aren't a resident of some states anymore avoid paying state income taxes. South Dakota does not have a state income tax and only requires residents to be there one day per year to maintain residency.
Resources Mentioned In Today's Conversation
- Greenback Expat Tax Services
- The Simple StartUp by Rob Phelan
- Switch to Mint Mobile and get free shipping
- Register for The Simple StartUp Fall Challenge
- Mailbox Forwarding