Global Financial Planning for U.S. Expats and Green Card Holders

by
Leo Wealth

Vivian Hu, CFP®, CDFA®, TEP

1. Tax Obligations Have No Borders

American citizens and green card holders are both U.S. taxpayers and are subject to annual tax filings with the IRS, regardless of their residence. This includes the obligation to report global income. For 2024, U.S. expatriates who work abroad for at least 330 full days in a consecutive 12-month period may qualify for a Foreign Earned Income Exclusion, which allows them to exclude up to $126,500 of their income from U.S. taxation. Nevertheless, it’s still required to file even when earnings are below this threshold, to maintain compliance with U.S. tax laws.

Two often-overlooked requirements for U.S. taxpayers are the FATCA (Foreign Account Tax Compliance Act) and FBAR (Foreign Bank Account Reporting). FATCA requires reporting of foreign financial assets on Form 8938 if their value falls between $200,000 and $600,000. The FBAR requirement obligates U.S. taxpayers to report if total aggregated foreign bank accounts exceed $10,000 on any given day of a year, using FinCEN Form 114.

Working with a tax advisor or CPA skilled in international tax law can provide crucial guidance on tax treaties and foreign tax credits to prevent double taxation.

2. Prudent Investment Strategies

Americans living abroad should be cautious with their investment choices. Many non-U.S. investment vehicles, including foreign mutual funds, ETFs, hedge funds, and pension funds, can be classified under the PFIC (Passive Foreign Investment Company) rules, leading to unfavourable tax treatment.

Many bankers or local investment advisors outside of the U.S. may not be equipped with the best tax knowledge investing for U.S. citizens. It’s imperative to work with an advisor who can navigate the tax implications of PFIC rules and adopt strategies like tax loss harvesting to optimize expatriates’ investment portfolios.

A comprehensive portfolio strategy should address risk management and diversification, tailored to an individual’s financial goals, risk tolerance, income requirements, and personal timelines.

3. Retirement and Social Security Considerations

U.S. citizens abroad can still contribute to Traditional IRA and Roth IRA accounts, following standard eligibility requirements. The contribution limit for 2024 is $7,000 for those aged below 50 and $8,000 for those 50 or older. Traditional IRAs are tax-deductible depending on your income level and whether you have an employer-sponsored plan. Roth IRAs are not tax-deductible; there are income limits to contribute to a Roth IRA, however, you will get tax-free qualified distribution if taken after 59.5.

For expats, your Foreign Earned Income Exclusion amount may limit your eligibility to contribute to IRA and Roth IRAs. Many countries will honour the tax-deferral status of IRA accounts, however, in certain countries with higher taxes than the U.S., it may be less advisable to contribute to an IRA. It is crucial to check with local rules and treaties when making distributions, some countries also don’t recognize tax-free qualified Roth IRA distributions.

Additionally, expats may receive Social Security benefits overseas, provided they have earned sufficient credits. While Medicare is available to expats, it does not cover medical expenses incurred abroad.

4. Cross-Border Estate Planning

The enforceability of a U.S. Will can vary depending on the jurisdiction. Americans abroad should consider creating local estate planning documents, especially in countries with specific legal requirements or languages different from English. Situations, where local laws may not recognize testamentary freedom or require adherence to forced heirship statutes, necessitate careful planning. Holding real estate and vacation homes in multiple countries may also demand localized estate documents to streamline the probate process.

In addition, for expatriate families with minors, local guardianship arrangements are essential to ensure care continuity in unforeseen circumstances.

Navigating U.S. estate tax laws, which differ from other countries’ inheritance tax structures, requires specialized knowledge. For example, in the U.S., estate tax is imposed on the deceased, while in many other jurisdictions, the estate tax is imposed on the beneficiaries; in addition to the federal estate tax, many states also impose state estate tax; U.S. federal estate tax rates are 40% on the value of the estate exceeding the lifetime exemption amount of $13.6mm, which is set to sunset in 2026. The estate tax rules also change over time, it is essential to review your estate plan once every few years or when there is a life event such as a newborn, marriage, or divorce.

5. Family Gifting

For expat families with mixed nationalities, gift tax regulations can be complex. In 2024, a U.S. citizen can gift up to $185,000 tax-free to a non-citizen spouse annually. The gift tax exemption for U.S. citizens to any beneficiary is $18,000 per year. Utilizing this exemption for contributions to a child’s 529 college savings plan can be a strategic way to support educational expenses, with the potential benefit of tax-free growth and income if distributions are for qualified educational costs at many qualified institutions worldwide.

In conclusion, American expatriates face a unique set of financial planning challenges that require careful navigation of U.S. and foreign tax laws, investment strategies, retirement planning, and estate considerations. Proactive planning and expert advice are essential to optimize financial health while living abroad.


DISCLOSURES

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Not associated with or endorsed by the Social Security Administration or any other government agency.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional.  Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty.  Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met:  1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.

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