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2 Tax Tips for U.S. Retirees Moving Overseas

The more you learn about personal finance, the more complicated your questions are likely to get. But never fear: Hosts Robert Brokamp and Alison Southwick named their podcast Motley Fool Answers for a reason, and the Oct. 29 episode -- the monthly mailbag show -- the co-hosts will tackle a whole bunch of money conundrums with a bit of help from Motley Fool Wealth Management Director of Financial Planning Megan Brinsfield, CPA, CFP, and all-around fine human being.

In this segment, they dig into a couple of key details around the tax situations of Americans who leave the U.S. to retire. First comes one that applies no matter where you're living -- what is the best way to designate which assets you sell from your portfolio as you start drawing on your assets to pay your expenses? The second concerns the appealing-sounding Foreign Earned Income Exclusion: Can you use it to avoid capital gains taxes?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 29, 2019.

Alison Southwick: The last question and it's so perfect that the person who's answering it has a "frugal weirdo" sticker on her computer. And she went to FinCon.

Megan Brinsfield: Yup.

Southwick: "I took your advice on FI -- financial independence -- and now I'm going to RE -- retire early. That being said, I'm moving overseas to do it and I'm just trying to understand tax implications. I will be in my mid-40s and plan to take a bunch of cash and move it into an index fund or funds. For simplicity, let's say I'm starting with $1 million in cash and I'll need $50,000 a year for my comfy lifestyle.

"Every year when I cash out $50,000, will I need to be specific about which specific shares I sell? Will I need to pay capital gains tax, or does this qualify for the Foreign Earned Income Exclusion?"

Brinsfield: Great questions, here! I'm just slightly concerned for this person's RE plan based on a 5% withdrawal.

Robert Brokamp: That was my first thought, but he said it's hypothetical.

Brinsfield: Just round numbers.

Brokamp: Right.

Brinsfield: That aside, I'm assuming we're just using round numbers and making easy math. The important thing is anytime you are selling or disposing of an asset is understanding what disposition methods might apply. We all know I could take first in, first out. I could take last in, first out. I could take an average cost. And with any sort of fund, you have the option of doing an average cost, but that eliminates specific ID in the future.

So when you open any sort of brokerage account, one of the many things that you're agreeing to is what disposition method you're applying to your account and most of the default is last in, first out. And you can change that, if you want to, to I actually want the highest cost basis to come out first, or the lowest cost basis to come out first.

It's one of those things that gets lost in the weeds for a lot of people until it really matters, because if you are selling something that you have -- in this case, dollar-cost averaged into -- over a period of time, it's going to be much more advantageous to sell the stuff you just bought and has very little gain than selling the stuff you bought 10 years ago that has, in theory, accumulated more.

But, yes, you will be subject to capital gains taxes on that and so one thing we just talked about was the fact that you can have a certain amount of capital gains every year that's tax-free, so even as a single person, you can have about $50,000 of long-term gain income before you're paying any tax on that. To me that is an advantageous approach.

One thing to keep in mind is that the Foreign Earned Income Exclusion is something that sounds really exciting...

Southwick: Because it has the word "foreign" in it...

Brinsfield: And "exclusion."

Brokamp: Who doesn't like exclusion?

Southwick: It's a fancy beach somewhere in Greece. Call it Billionaire's Island.

Brinsfield: Yes, it's a lot of trigger words. It sounds cool. It is cool for people that fit into the boxes necessary. People think, "Oh, because it's foreign, if I'm just out of the country I apply it." No. It means that you are working and earning income overseas, like for a job. So if you are retired early overseas and getting capital gains income, that is not earned income and so the Foreign Earned Income Exclusion does not apply.

And the other thing just to keep in mind for this individual who's trotting off to retire early is that the U.S. is one of the few countries that taxes on citizenship. No matter where you are in the world, you still have to pay U.S. taxes and file a U.S. tax return. That could get really messy depending on where you reside, because many countries are tax based on residence. The idea is your first tax is on the place where you reside and then you file in the U.S. and sort of reconcile what you might owe to the relative taxing authorities. A lot of people live in Singapore for this reason.

Southwick: So try Singapore, Cody. Did he say where he was going? Just overseas, somewhere. Maybe he's thinking Singapore.

Brinsfield: Maybe. If you remember back years ago, one of the Facebook people said, "I'm relinquishing my U.S. citizenship and moving to Singapore." That was like the thing to do.

Southwick: I love how you make it sound like they just stood off of a cliff and just shouted it out and then made it legal.

Brinsfield: It's similar to abandoning your securities.

Southwick: I abandoned my securities. I relinquish my citizenship.

Brokamp: It's worthless. Worthless!

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Alison Southwick has no position in any of the stocks mentioned. Megan Brinsfield is an employee of Motley Fool Wealth Management, a separate sister company of The Motley Fool, LLC. The information provided is intended to be educational only and should not be construed as individualized advice. For individualized advice, please consult a financial professional. Megan Brinsfield owns shares of Facebook. Robert Brokamp, CFP owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

 


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