Advantages for US persons abroad

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wineandplaya
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Advantages for US persons abroad

Post by wineandplaya » Sat Nov 09, 2019 6:19 pm

There are some threads about all the unique tax-disadvantages that US persons (i.e. citizens and green card holders) abroad face. But there are also some unique tax *advantages*, both compared to non-US persons abroad and to US persons living in the US. To make the prospect of being a US person abroad less depressing, I thought it could be a good idea to get an overview of these advantages.

Here is what I could think of:

1. The US social security calculation favors people that have not worked their whole careers in the US, assuming that you have worked long enough to qualify (10 years or sometimes shorter). If I work 10 years in the US, each year hitting the social security maximum (currently $133k), I'm still in the 32 % bracket for social security. Which means a much better return on my social security contribution dollars than someone who works the full 35 years.

2. Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE.

3. Growth in US tax deferred accounts appears to often be protected by double-taxation agreements, often making these accounts advantageous to accounts available locally. For example, the Swedish equivalent of a Roth IRA (an "ISK") comes with a tax of about 0.5 % of the account value each year. Essentially adding a 0.5 % expense ratio to all your holdings.

4. Because of fierce competition, the investment options and trading costs in the US market are often superior to those available overseas (that you are being prevented from using). At least that's my impression.

What are other advantages of being a US person overseas?

TedSwippet
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Re: Advantages for US persons abroad

Post by TedSwippet » Sun Nov 10, 2019 4:35 am

wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
1. The US social security calculation favors people that have not worked their whole careers in the US, assuming that you have worked long enough to qualify (10 years or sometimes shorter). If I work 10 years in the US, each year hitting the social security maximum (currently $133k), I'm still in the 32 % bracket for social security. Which means a much better return on my social security contribution dollars than someone who works the full 35 years.
If you also qualify for a non-US pension as a result of working abroad, you do however need to watch out for SSA's 'windfall elimination provision'.

https://www.americansabroad.org/windfal ... provision/
If you receive a foreign pension, or a pension from work in the United States not covered by Social Security (such as a federal, state or local government agency in the US) or have worked in a foreign country, your Social Security benefits may be reduced by application of the "Windfall Elimination Provision" (WEP).

WEP was created by Public Law 98-21 in 1985. WEP was instituted as a result of the progessive method by which US Social Security benefits are computed. Persons with less earnings on their record receive a comparatively larger percentage of their average income. Under normal computations a beneficiary who paid relatively low Social Security taxes and who is drawing a separate pension may have what is perceived as an unfair advantage in their benefits. Before 1983, people whose primary job wasn't covered by Social Security had their benefits calculated as if they were long-term, low-wage workers. They had the advantage of receiving a Social Security benefit representing a higher percentage of their eanrings, plus a pension from a job for which they hadn't paid Social Security taxes.

Persons receiving US Social Security benefits and who have been employed in work for which they did not pay US Social Security taxes may see their US Social Seceurity benefits partially reduced (up to 50%) due to WEP rules. WEP is applied starting from the moment you are entitled to both US and foreign benefits even if you do not actually receive those benefits.
If the date you are entitled to a foreign pension is later than entitlement to US SS, taking US SS early and before it is subject to this reduction might be a consideration.
wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
2. Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE.
Another way to play this is to use excess foreign tax credits to 'soak up' contributions to a non-US pension. By not electing it into a treaty, you cause the US to treat it as a plain taxable account. If the tax differential is right, you may be able to exclude contributions from local tax and also pay no actual US tax on them. If you then move back to the US and the US has sole taxing rights to the pension (under treaty, say), the withdrawals of principal will also be free of US tax (because they are post-tax).

Ability to use this depends on you planning to return to the US on retirement, but it's a possible option. Also it can be better than losing unused foreign tax credits, which expire after ten years.
wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
3. Growth in US tax deferred accounts appears to often be protected by double-taxation agreements, often making these accounts advantageous to accounts available locally. For example, the Swedish equivalent of a Roth IRA (an "ISK") comes with a tax of about 0.5 % of the account value each year. Essentially adding a 0.5 % expense ratio to all your holdings.
Heavily dependent on treaty, though. You can mitigate currency risk by investing in local country assets in your IRA, if you don't plan to return to the US to retire.
wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
4. Because of fierce competition, the investment options and trading costs in the US market are often superior to those available overseas (that you are being prevented from using). At least that's my impression.
Broadly true. Nothing I'm aware of outside of the US undercuts Vanguard when it comes to cost of investing.
wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
What are other advantages of being a US person overseas?
5. You can potentially reduce your tax rate on US source dividends below the 30% for nonresident aliens in non-treaty countries, and 15% for those in most treaty countries. Unlike nonresident aliens, a US citizen living abroad (with a W-9 in place at their broker) suffers no US tax withholding on dividends. If your local tax rate is lower than the treaty rate for your country of residence, and your US tax rate is also lower, you end up paying less tax on these dividends than non-US citizens living in the same country.

6. You have a vastly higher US estate tax exemption than nonresident aliens, and so can safely hold up to $11mm of US assets without US estate tax problems. Your non-US citizen peers could be stuck at just $60k.

7. If you are a dual citizen from birth and haven't lived in the US recently, you are exempt from the US exit tax. Long term green card holders and naturalized citizens are not so lucky, even if they have a similar US residency history.

8. Nonresident aliens who directly own US real estate are taxed by the US at income tax rates on any capital gains, under FIRPTA. US citizens get much lower normal capital gains rates.

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HueyLD
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Re: Advantages for US persons abroad

Post by HueyLD » Sun Nov 10, 2019 6:39 am

The OP said: "Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE."

Your understanding is wrong. Here is what the IRS says:

"Figuring the tax:
Beginning with tax year 2006, a qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions."

https://www.irs.gov/individuals/interna ... -exclusion

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happyisland
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Re: Advantages for US persons abroad

Post by happyisland » Sun Nov 10, 2019 7:48 am

Pretty thin gruel on the financial 'advantages'. None of them applies to our situation, and none would overcome the other disadvantages that have been discussed ad nauseum in other threads. Double taxation and the requirement to file a bunch of expensive-to-generate paperwork every year are no joke.
Needless to say, the quality of life advantages of living abroad are well worth the hassle and expense. :D
Those are:
1. the challenge of learning a new way of life
2. getting to learn a new language
3. broadening your horizons (particularly nice for us from the US - our country is so huge it is easy to forget or at least discount the rest of the planet.

def6732
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Re: Advantages for US persons abroad

Post by def6732 » Sun Nov 10, 2019 8:32 am

I can’t think of many positives, but if you move to a politically unstable country as a US citizen you have the right to easily return to the US. Citizens of that politically unstable country probably don’t have that luxury.

bberris
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Re: Advantages for US persons abroad

Post by bberris » Sun Nov 10, 2019 8:47 am

I'm not sure about avoiding state income tax. You would have to establish residence in a no tax state first and then sever all ties with the state you left. Some states are very aggressive in collecting from non residents.

cbeck
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Re: Advantages for US persons abroad

Post by cbeck » Sun Nov 10, 2019 9:29 am

bberris wrote:
Sun Nov 10, 2019 8:47 am
I'm not sure about avoiding state income tax. You would have to establish residence in a no tax state first and then sever all ties with the state you left. Some states are very aggressive in collecting from non residents.
For some reason many people believe this notion that you have to establish residence in a no-income-tax state before expatting, but with the exception of the unfortunate former residents of VA, it is not true. US citizens have no obligation to be a resident of a state. By scrupulously avoiding tax domicile under the rules of your former state, you will have avoided liability for state income tax, but this includes doing nothing that would indicate an intention to return at any time in the future. The states that are notorious for going after taxes from long-time expats, such as CA, do so mostly by asserting an intention to return, not because the unfortunate expat did not live for a few months in FL.

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JoMoney
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Re: Advantages for US persons abroad

Post by JoMoney » Sun Nov 10, 2019 9:41 am

cbeck wrote:
Sun Nov 10, 2019 9:29 am
bberris wrote:
Sun Nov 10, 2019 8:47 am
I'm not sure about avoiding state income tax. You would have to establish residence in a no tax state first and then sever all ties with the state you left. Some states are very aggressive in collecting from non residents.
For some reason many people believe this notion that you have to establish residence in a no-income-tax state before expatting, but with the exception of the unfortunate former residents of VA, it is not true. US citizens have no obligation to be a resident of a state. By scrupulously avoiding tax domicile under the rules of your former state, you will have avoided liability for state income tax, but this includes doing nothing that would indicate an intention to return at any time in the future. The states that are notorious for going after taxes from long-time expats, such as CA, do so mostly by asserting an intention to return, not because the unfortunate expat did not live for a few months in FL.
FWIW, if you're going to be working outside of CA for 18+ months for work , there's less need to try to escape it as a tax domicile. CA has a "safe harbor" provision that allows those working abroad to file as a CA non-resident and not owe tax on their income earned outside of CA.
Anecdotally, I've known two people who had the state of VA go after them after changing residences.
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Topic Author
wineandplaya
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Re: Advantages for US persons abroad

Post by wineandplaya » Sun Nov 10, 2019 10:15 am

TedSwippet wrote:
Sun Nov 10, 2019 4:35 am
f you also qualify for a non-US pension as a result of working abroad, you do however need to watch out for SSA's 'windfall elimination provision'.

https://www.americansabroad.org/windfal ... provision/

I think those are increasingly rare abroad, at least in Europe. I've worked and paid into the retirement system in 5 different European countries and never been subject to one.

EDIT: Actually, I don't *think* I've been subject to one. WEP is mentioned specifically in some totalization agreements and I quickly concluded that it won't apply to me.
Last edited by wineandplaya on Sun Nov 10, 2019 11:33 am, edited 1 time in total.

redrocker
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Re: Advantages for US persons abroad

Post by redrocker » Sun Nov 10, 2019 10:26 am

wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm

What are other advantages of being a US person overseas?
Not personal experience but I know of several US citizens who live abroad and have access to much cheaper health insurance. In the absence of that, in some countries (S Korea for example) health insurance may even be eschewed by ex pats in moderately good health because the cost of health care is so low there.

Dude2
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Re: Advantages for US persons abroad

Post by Dude2 » Sun Nov 10, 2019 11:04 am

I am a US ex-pat, but I work for the same company abroad that I do in the US. I pay all of those taxes -- Federal, State, SS, Medicare. I don't think the definition of expat specifies you work outside the US for a foreign company.
def6732 wrote:
Sun Nov 10, 2019 8:32 am
I can’t think of many positives, but if you move to a politically unstable country as a US citizen you have the right to easily return to the US. Citizens of that politically unstable country probably don’t have that luxury.
Bravo!

TedSwippet
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Re: Advantages for US persons abroad

Post by TedSwippet » Sun Nov 10, 2019 11:41 am

wineandplaya wrote:
Sun Nov 10, 2019 10:15 am
I think those are increasingly rare abroad, at least in Europe. I've worked and paid into the retirement system in 5 different European countries and never been subject to one.
It may depend on how long you work in those countries. For example, the US and the UK have a 'totalization agreement', which cross-credits SS taxes paid in one country to another, up to a point. Because I worked in the US for more than ten years though, I qualify for SS payments from the US, and so do not get to use the totalization agreement.

Because I also qualify for a UK state pension, the US will reduce my US SS payments under the 'windfall elimination provision'. I have yet to see how much reduction I will suffer, but I am not optimistic that it won't be the full 50%.
happyisland wrote:
Sun Nov 10, 2019 7:48 am
Pretty thin gruel on the financial 'advantages'. None of them applies to our situation, and none would overcome the other disadvantages that have been discussed ad nauseum in other threads.
Unfortunately. From looking at it, the 'advantages' for US citizens mostly seem to boil down to being able to avoid the 'punishments' that the US puts in place for nonresident aliens.

assyadh
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Re: Advantages for US persons abroad

Post by assyadh » Sun Nov 10, 2019 12:17 pm

OP, do you plan to retire in the US? Or do you actually plan to live out of the US forever?

If the latter, then holding the US citizenship is a huge liability. Your financial life will be ruined.

Topic Author
wineandplaya
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Re: Advantages for US persons abroad

Post by wineandplaya » Sun Nov 10, 2019 12:31 pm

TedSwippet wrote:
Sun Nov 10, 2019 11:41 am
It may depend on how long you work in those countries.
I also think it depends *when* you worked in those countries. For Sweden, the old pension system (that could trigger WEP as per the totalization agreement) was replaced with a defined-contribution system in the mid 90'ies. If you worked there the past couple of years, you're fine.

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wineandplaya
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Re: Advantages for US persons abroad

Post by wineandplaya » Sun Nov 10, 2019 1:04 pm

assyadh wrote:
Sun Nov 10, 2019 12:17 pm
OP, do you plan to retire in the US? Or do you actually plan to live out of the US forever?

If the latter, then holding the US citizenship is a huge liability. Your financial life will be ruined.
My wife's family all live in the US and my family all live in Europe. I think that the most likely scenario is that we will spend a couple of years in Europe, then go back to the US and work here until retirement, then retire in Europe. While we plan to retire in Europe, I do think that it's likely that we at some point will want to spend at least a year in the US to be close to her family. We also don't know where our kids will want to live. The European countries we consider living in all have capital gains taxes of 23 % - 30 %, so I figured maxing out on all our US tax-deferred options (including mega backdoor Roth, but excluding HSA) is our best option. Double-taxation treaties should hopefully avoid paying high capital gain taxes while in Europe. Roth monies are a bit tricky, but I think it should be possible to cash out on those accounts at some time when we are US tax residents anyway. Basically, I have personal reasons to have US citizenship (and my wife wouldn't want to renounce hers anyway) and our plan is to make the best of the situation.

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wineandplaya
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Re: Advantages for US persons abroad

Post by wineandplaya » Sun Nov 10, 2019 1:16 pm

HueyLD wrote:
Sun Nov 10, 2019 6:39 am
The OP said: "Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE."

Your understanding is wrong. Here is what the IRS says:

"Figuring the tax:
Beginning with tax year 2006, a qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions."

https://www.irs.gov/individuals/interna ... -exclusion
OK, thanks. But that only applies to FEIE so using FTC it should still be possible to do a cheap Roth rollover (in the 0 %, 10 % or 12 % federal tax brackets and no state taxes) I would think.

bgreat
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Re: Advantages for US persons abroad

Post by bgreat » Sun Nov 10, 2019 1:33 pm

wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
2. Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE.
The vast majority of tax treaties I've read explicitly give country of residence the right to tax pension and retirement scheme withdrawals. There aren't many if any countries where this would be a good idea. (Whereby the tax-treaty is only really relevant in terms of reducing the US tax, most countries will tax such withdrawals even if there's no treaty.)

assyadh
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Re: Advantages for US persons abroad

Post by assyadh » Sun Nov 10, 2019 2:50 pm

bgreat wrote:
Sun Nov 10, 2019 1:33 pm
wineandplaya wrote:
Sat Nov 09, 2019 6:19 pm
2. Depending on the local taxation, you can slowly roll-over pre-tax IRA/401(k) to Roth, paying little or no income taxes (no state taxes, little federal taxes if foreign income is excluded using the FTC or FEIE.
The vast majority of tax treaties I've read explicitly give country of residence the right to tax pension and retirement scheme withdrawals. There aren't many if any countries where this would be a good idea. (Whereby the tax-treaty is only really relevant in terms of reducing the US tax, most countries will tax such withdrawals even if there's no treaty.)
Of the top of my head I know about France, the UK and Belgium where the roth money would be shielded.

France explicitly says only the US taxes it, but it counts toward your marginal tax rate.

Belgium's treaty says that if no taxes would have been due to the US on a pension if the person was a US resident, then no taxes are due in Belgium (de facto shielding roth iras, and maaaybe traditional if exemptions and tax credit but that may be a stretch)

The UK recognizes the roth, but TedSwippet will be able to provide more info.

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mrspock
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Re: Advantages for US persons abroad

Post by mrspock » Sun Nov 10, 2019 3:56 pm

assyadh wrote:
Sun Nov 10, 2019 12:17 pm
...

If the latter, then holding the US citizenship is a huge liability. Your financial life will be ruined.
This seems a bit over dramatic. You file an extra tax return, and since US taxes are generally lower than the rest of the developed world where the US has a tax treaty, the source of any financial hardship is more likely to be due to higher taxes in your domicile country.

I also think it makes a difference if we are talking about dual citizens vs those living overseas with no other citizenship. In the former case your citizenship may bestow upon you all kinds of benefits such as tax policy, health care, pensions and long term care in your golden years. These can balance out any modest “double taxation” pain you might see.

While maintaining US citizenship might be cumbersome, and inconvenient come tax time, it’s by no means a path to financial ruin.

rich126
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Re: Advantages for US persons abroad

Post by rich126 » Sun Nov 10, 2019 4:57 pm

Are there more advantages if you are working for a US company or the government while working in a foreign country?

TedSwippet
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Re: Advantages for US persons abroad

Post by TedSwippet » Sun Nov 10, 2019 5:37 pm

mrspock wrote:
Sun Nov 10, 2019 3:56 pm
I also think it makes a difference if we are talking about dual citizens vs those living overseas with no other citizenship. In the former case your citizenship may bestow upon you all kinds of benefits such as tax policy, health care, pensions and long term care in your golden years. These can balance out any modest “double taxation” pain you might see.
It very much depends on circumstances. This survey, published at the end of last month, shows comments from a lot of people who are deeply unhappy that they hold US citizenship:

https://www.americanexpatfinance.com/ne ... all-survey
http://www.citizenshipsolutions.ca/wp-c ... mments.pdf

Perhaps by design, this survey seems to have attracted more -- and more vocal -- responses from people who find US citizenship to be a significant limitation in their lives, than from those that value it and find it at worst a minor irritation with just "modest" double-taxation. So while it may be true to say that for some the benefits might "balance out", it is also clearly true that for others, many of whom relate stories of real difficulty and discrimination, they absolutely do not.
mrspock wrote:
Sun Nov 10, 2019 3:56 pm
While maintaining US citizenship might be cumbersome, and inconvenient come tax time, it’s by no means a path to financial ruin.
"Financial ruin" is obviously overstatement. However, "cumbersome, and inconvenient" is understatement.

assyadh
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Re: Advantages for US persons abroad

Post by assyadh » Sun Nov 10, 2019 6:15 pm

mrspock wrote:
Sun Nov 10, 2019 3:56 pm
assyadh wrote:
Sun Nov 10, 2019 12:17 pm
...

If the latter, then holding the US citizenship is a huge liability. Your financial life will be ruined.
This seems a bit over dramatic. You file an extra tax return, and since US taxes are generally lower than the rest of the developed world where the US has a tax treaty, the source of any financial hardship is more likely to be due to higher taxes in your domicile country.

I also think it makes a difference if we are talking about dual citizens vs those living overseas with no other citizenship. In the former case your citizenship may bestow upon you all kinds of benefits such as tax policy, health care, pensions and long term care in your golden years. These can balance out any modest “double taxation” pain you might see.

While maintaining US citizenship might be cumbersome, and inconvenient come tax time, it’s by no means a path to financial ruin.
Examples of limitations include but are not limited to:

Being unable to prepare for retirement in your country of residence (no tax advantaged savings account in most countries because not recognized by the IRS).

Local pensions seen as PFICs.

Heavy double taxation in some cases: up until last month, the IRS did not recognize France CSG for tax credit. (17.2% of income). I don't think this is a modest double taxation. Only 10+ years of legal challenge solved this.

Can not get a mortgage because of Fatca.

If you get a shadow capital gain in real estate (you bought a house in euros, sold for the same amount, but the euro appreciated vs the usd) you owe taxes.

Bank account denied. Or just the most expensive useless bank account opened.

You live in a different currency than Usd. While this does not impact the stock portion of your portfolio, what do you do with bonds/money market accounts?

You can not open a small business because the taxation is non sense.

The cost of compliance is easily in the 1000s+

Some people get job promotion denied because of Fbars.

Anyways. You can see how American citizenship is unfortunately becoming tier B.

assyadh
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Re: Advantages for US persons abroad

Post by assyadh » Sun Nov 10, 2019 6:19 pm

TedSwippet wrote:
Sun Nov 10, 2019 5:37 pm
mrspock wrote:
Sun Nov 10, 2019 3:56 pm
I also think it makes a difference if we are talking about dual citizens vs those living overseas with no other citizenship. In the former case your citizenship may bestow upon you all kinds of benefits such as tax policy, health care, pensions and long term care in your golden years. These can balance out any modest “double taxation” pain you might see.
It very much depends on circumstances. This survey, published at the end of last month, shows comments from a lot of people who are deeply unhappy that they hold US citizenship:

https://www.americanexpatfinance.com/ne ... all-survey
http://www.citizenshipsolutions.ca/wp-c ... mments.pdf

Perhaps by design, this survey seems to have attracted more -- and more vocal -- responses from people who find US citizenship to be a significant limitation in their lives, than from those that value it and find it at worst a minor irritation with just "modest" double-taxation. So while it may be true to say that for some the benefits might "balance out", it is also clearly true that for others, many of whom relate stories of real difficulty and discrimination, they absolutely do not.
mrspock wrote:
Sun Nov 10, 2019 3:56 pm
While maintaining US citizenship might be cumbersome, and inconvenient come tax time, it’s by no means a path to financial ruin.
"Financial ruin" is obviously overstatement. However, "cumbersome, and inconvenient" is understatement.

I'm sorry but I have to disagree on this. For some Accidental Americans (ie people who left the US on diapers, born from foreign parents) that don't have a SSN, entering the US tax system is indeed a financially ruining event. They can not comply because that means a tax bill in the hundreds of thousands of dollars.

But surely the impact is not the same frome someone who is already compliant, living in the US, and settling abroad. If one has strong ties to the US, then being compliant makes a lot of sense.

typical.investor
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Re: Advantages for US persons abroad

Post by typical.investor » Sun Nov 10, 2019 6:50 pm

wineandplaya wrote:
Sun Nov 10, 2019 10:15 am
TedSwippet wrote:
Sun Nov 10, 2019 4:35 am
f you also qualify for a non-US pension as a result of working abroad, you do however need to watch out for SSA's 'windfall elimination provision'.

https://www.americansabroad.org/windfal ... provision/

I think those are increasingly rare abroad, at least in Europe. I've worked and paid into the retirement system in 5 different European countries and never been subject to one.
Wait, are you collecting social security already? WEP comes into play when you are collecting US SS and also a foreign pension. For the European countries, will you receive a pension?
wineandplaya wrote:
Sun Nov 10, 2019 10:15 am
EDIT: Actually, I don't *think* I've been subject to one. WEP is mentioned specifically in some totalization agreements and I quickly concluded that it won't apply to me.
If you aren't using the totalization agreement to claim benefits, then the WEP probably doesn't take effect. That is my understanding anyway. But if you have paid into systems, don't qualify for lack of contributions (perhaps measured by years or quarters of contributions) and don't use the totalization agreement, then your pension payments would effectively be lost.

Totalization agreements can help people qualify for foreign pensions even if you don't have enough credits otherwise. You only receive payment based on the amount you payed to the foreign country, but your payment into the American system can count towards establishing eligibility for the foreign pension. And visa-versa to qualify for social security. WEP will reduce how much SS you can collect though.

See https://www.ssa.gov/international/wep_disclaimer.html

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wineandplaya
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Re: Advantages for US persons abroad

Post by wineandplaya » Sun Nov 10, 2019 9:29 pm

typical.investor wrote:
Sun Nov 10, 2019 6:50 pm
wineandplaya wrote:
Sun Nov 10, 2019 10:15 am
TedSwippet wrote:
Sun Nov 10, 2019 4:35 am
f you also qualify for a non-US pension as a result of working abroad, you do however need to watch out for SSA's 'windfall elimination provision'.

https://www.americansabroad.org/windfal ... provision/

I think those are increasingly rare abroad, at least in Europe. I've worked and paid into the retirement system in 5 different European countries and never been subject to one.
Wait, are you collecting social security already? WEP comes into play when you are collecting US SS and also a foreign pension. For the European countries, will you receive a pension?
wineandplaya wrote:
Sun Nov 10, 2019 10:15 am
EDIT: Actually, I don't *think* I've been subject to one. WEP is mentioned specifically in some totalization agreements and I quickly concluded that it won't apply to me.
If you aren't using the totalization agreement to claim benefits, then the WEP probably doesn't take effect. That is my understanding anyway. But if you have paid into systems, don't qualify for lack of contributions (perhaps measured by years or quarters of contributions) and don't use the totalization agreement, then your pension payments would effectively be lost.

Totalization agreements can help people qualify for foreign pensions even if you don't have enough credits otherwise. You only receive payment based on the amount you payed to the foreign country, but your payment into the American system can count towards establishing eligibility for the foreign pension. And visa-versa to qualify for social security. WEP will reduce how much SS you can collect though.

See https://www.ssa.gov/international/wep_disclaimer.html
Thanks for pointers. I don't think I fully understand if and how my European pension will affect my social security. At least on a first reading, it didn't seem like WEP would apply, but I could be wrong.

I am still far from retirement, 37yo currently. I'm mostly trying to understand how the systems work so that we can use them to our advantage and avoid "financial ruin". We still have freedom to decide what savings vehicles to use and maybe also to time relocations across the Atlantic.

Some of my current conclusions are:

1. Make sure I have worked at least 10 years in the US to qualify for both Social Security and Medicare without totalization agreements.

2. Prefer pre-tax IRA/401(k) to Roth: There is no guarantee that the Roth earnings will actually be tax-free.

3. Prefer Roth to taxable accounts, at least when we're this far from retirement. Even if we have to pay high European income tax on the earnings, we still come out ahead thanks to 30+ years of tax-deferred growth. Unlike US retirees, our capital gains tax rate will probably go up in retirement.

4. If possible, try to time Roth withdrawals when we're US residents, either during retirement or shortly before retirement.

5. Make sure our HSA and 529 accounts are empty when we move oversees. They don't appear to be protected by double taxation treaties.

6. Make the most of the FTC to avoid double taxation. Selling real estate appears to be a potential pitfall where US tends to tax gains the same year whereas in Europe, it is often advantageos to carry the gains into your next house, potentially leading to double taxation in the future.

7. Tax filing is complicated and mistakes are extremely costly. A good understanding the taxes that affect our situation, will pay off greatly in the future.

ivk5
Posts: 985
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Re: Advantages for US persons abroad

Post by ivk5 » Mon Nov 11, 2019 4:59 am

One advantage I don’t see frequently cited is US credit card rewards on no-foreign-transaction-fee cards. Easily 2%+ rebate value for our usage pattern. I use US cards in preference to local credit/debit cards almost always.

TedSwippet
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Location: UK

Re: Advantages for US persons abroad

Post by TedSwippet » Mon Nov 11, 2019 7:17 am

assyadh wrote:
Sun Nov 10, 2019 6:19 pm
For some Accidental Americans (ie people who left the US on diapers, born from foreign parents) that don't have a SSN, entering the US tax system is indeed a financially ruining event. They can not comply because that means a tax bill in the hundreds of thousands of dollars.
This is theoretically true, but it seems like it should be rare in practice. I'm sure a fair few scrupulously honest folk will have been scalped by the US, but for the most part, any sensible person facing this situation will simply not enter the US tax system. They have a citizenship other than US, and so can carry on ignoring their 'US person-ness' and not complying with an entirely foreign tax regime, probably indefinitely.

Having a US birthplace on a passport is one of the FATCA 'indicia', so for those born in the US, renouncing and obtaining a CLN (cost $2,350, by far the highest citizenship renunciation fee on the planet) might be a sensible defence against questions from their non-US bank on this. Tax compliance is not a pre-requisite to renouncing US citizenship.

In fact, the past very much suggests that particularly for accidental Americans, ignoring US tax rather than complying with it is by far the safer route. People who entered the original offshore "amnesties" (and I use that term very loosely) such as OVDP will have missed out on the much better 'streamlined offshore' program that followed it. And anyone that entered either may now be sideswiped by retroactive GILTI taxes, whereas those who ignored the whole thing and have never filed a form 5471 can ignore that too. It also turns out that 'conservatively' filing a 3520 for a non-US pension can leave you exposed to automatic and arguably incorrectly applied $10k penalties for late-filing. So again, non-filing now looks like the safer route.

In the past, similar discussion on this forum led to some acrimonious and unhelpful comments from readers who either had not expended any effort trying to understand the issues, or were in the fortunate position of not (yet) being affected by them. Hopefully we are all now capable of having a more grownup discussion on this.

Back on topic ... is there enough material here for a wiki page? While there are a few small niche non-tax benefits, I count only a very few actual US tax advantages, and at least one of these, possibly two, are really just being able to avoid US tax nonresident alien disadvantages. If not a new page, maybe a short section in this page?

assyadh
Posts: 88
Joined: Tue Sep 18, 2018 12:44 pm

Re: Advantages for US persons abroad

Post by assyadh » Mon Nov 11, 2019 9:30 am

TedSwippet wrote:
Mon Nov 11, 2019 7:17 am
assyadh wrote:
Sun Nov 10, 2019 6:19 pm
For some Accidental Americans (ie people who left the US on diapers, born from foreign parents) that don't have a SSN, entering the US tax system is indeed a financially ruining event. They can not comply because that means a tax bill in the hundreds of thousands of dollars.
This is theoretically true, but it seems like it should be rare in practice. I'm sure a fair few scrupulously honest folk will have been scalped by the US, but for the most part, any sensible person facing this situation will simply not enter the US tax system. They have a citizenship other than US, and so can carry on ignoring their 'US person-ness' and not complying with an entirely foreign tax regime, probably indefinitely.

Having a US birthplace on a passport is one of the FATCA 'indicia', so for those born in the US, renouncing and obtaining a CLN (cost $2,350, by far the highest citizenship renunciation fee on the planet) might be a sensible defence against questions from their non-US bank on this. Tax compliance is not a pre-requisite to renouncing US citizenship.

In fact, the past very much suggests that particularly for accidental Americans, ignoring US tax rather than complying with it is by far the safer route. People who entered the original offshore "amnesties" (and I use that term very loosely) such as OVDP will have missed out on the much better 'streamlined offshore' program that followed it. And anyone that entered either may now be sideswiped by retroactive GILTI taxes, whereas those who ignored the whole thing and have never filed a form 5471 can ignore that too. It also turns out that 'conservatively' filing a 3520 for a non-US pension can leave you exposed to automatic and arguably incorrectly applied $10k penalties for late-filing. So again, non-filing now looks like the safer route.

In the past, similar discussion on this forum led to some acrimonious and unhelpful comments from readers who either had not expended any effort trying to understand the issues, or were in the fortunate position of not (yet) being affected by them. Hopefully we are all now capable of having a more grownup discussion on this.

Back on topic ... is there enough material here for a wiki page? While there are a few small niche non-tax benefits, I count only a very few actual US tax advantages, and at least one of these, possibly two, are really just being able to avoid US tax nonresident alien disadvantages. If not a new page, maybe a short section in this page?

Completely agree. Entering the US tax system in this case is wrong. Often it's the scaremonging of some US tax compliance companies pushing people to do it. Just applying for an SSN to satisfy your bank is often enough.

Anyways, given the info on this page, it would be good to compile all of it, and come with a pros and cons wiki page. I also have been facing such questions (should I invest into a Roth IRA or not).

We could also compile a list of tax treaties that recognize/don't recognize IRAs as tax deferred/free.

bgreat
Posts: 108
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Re: Advantages for US persons abroad

Post by bgreat » Mon Nov 11, 2019 1:00 pm

assyadh wrote:
Sun Nov 10, 2019 2:50 pm
Of the top of my head I know about France, the UK and Belgium where the roth money would be shielded.

France explicitly says only the US taxes it, but it counts toward your marginal tax rate.

Belgium's treaty says that if no taxes would have been due to the US on a pension if the person was a US resident, then no taxes are due in Belgium (de facto shielding roth iras, and maaaybe traditional if exemptions and tax credit but that may be a stretch)

The UK recognizes the roth, but TedSwippet will be able to provide more info.
Taxes on the Roth are a completley separate issue. The roll-over itself is generally a taxable event in country of residence, because from the country of residence's perspective its a withdrawal from a pre-tax account. It doesn't matter that the Roth is protected, the act of taking money out the IRA/401k (even if paying it directly back into a Roth) is the issue.

For the very first country you list: French-US tax treaty confirms that France can tax withdrawals, except for Social Security and equivalents which are taxed in the country making the payment (if applicable). You may be able to avoid taxes on the contents of the Roth after rollover, but you need to look at the rollover itself first.
ivk5 wrote:
Mon Nov 11, 2019 4:59 am
One advantage I don’t see frequently cited is US credit card rewards on no-foreign-transaction-fee cards. Easily 2%+ rebate value for our usage pattern. I use US cards in preference to local credit/debit cards almost always.
You don't need to be a US person to get one, although it generally is necessary to at least briefly work in the US to get an SSN which in turn allows you to get credit cards.

Those credit cards still generally charge a 0.5% fee (or at least Visa/Mastercard do), and you need to convert to USD before that incurring further losses, which reduces those gains.

(The main reason US cards offer such high percentages is however seemingly the high interchange fees charged in the first place. You can thank US retailers for subsidising your cashback.)

def6732
Posts: 16
Joined: Sat Sep 01, 2018 9:07 am

Re: Advantages for US persons abroad

Post by def6732 » Mon Nov 11, 2019 1:49 pm

I think I've come up with something positive.
If you are a European resident I have found cheaper car rental rates for visits to the US using European car rental sites. These rates often also include insurance (useful if you no longer have US car insurance as US credit cards do not cover liability insurance). You have to read the small print though as some of these rates are not valid for US citizens.

assyadh
Posts: 88
Joined: Tue Sep 18, 2018 12:44 pm

Re: Advantages for US persons abroad

Post by assyadh » Mon Nov 11, 2019 2:34 pm

def6732 wrote:
Mon Nov 11, 2019 1:49 pm
I think I've come up with something positive.
If you are a European resident I have found cheaper car rental rates for visits to the US using European car rental sites. These rates often also include insurance (useful if you no longer have US car insurance as US credit cards do not cover liability insurance). You have to read the small print though as some of these rates are not valid for US citizens.
Yes, Autoescape.com has a really great contract with CDW and other insurances included. I use it when family is visiting from Europe.

cbeck
Posts: 289
Joined: Sun Jun 24, 2012 1:28 am

Re: Advantages for US persons abroad

Post by cbeck » Mon Nov 11, 2019 5:08 pm

assyadh wrote:
Sun Nov 10, 2019 2:50 pm

Taxes on the Roth are a completley separate issue. The roll-over itself is generally a taxable event in country of residence, because from the country of residence's perspective its a withdrawal from a pre-tax account. It doesn't matter that the Roth is protected, the act of taking money out the IRA/401k (even if paying it directly back into a Roth) is the issue.
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.

ivk5
Posts: 985
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Re: Advantages for US persons abroad

Post by ivk5 » Mon Nov 11, 2019 6:06 pm

cbeck wrote:
Mon Nov 11, 2019 5:08 pm
assyadh wrote:
Sun Nov 10, 2019 2:50 pm

Taxes on the Roth are a completley separate issue. The roll-over itself is generally a taxable event in country of residence, because from the country of residence's perspective its a withdrawal from a pre-tax account. It doesn't matter that the Roth is protected, the act of taking money out the IRA/401k (even if paying it directly back into a Roth) is the issue.
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.
Switzerland, where I live, certainly taxes its tax residents on their worldwide income, for those required to file a return, which includes Swiss citizens, permanent residents, and anyone with income over something like CHF 120k.

It’s true though that foreigners with earnings below the threshold have the option to accept the tax-at-source withholding as final without filing a return, which I think does have the effect of excluding foreign-source earnings.

Curious how it works in your country and what the basis is of the generalization regarding European countries in general.

EddyB
Posts: 1082
Joined: Fri May 24, 2013 3:43 pm

Re: Advantages for US persons abroad

Post by EddyB » Mon Nov 11, 2019 8:02 pm

def6732 wrote:
Mon Nov 11, 2019 1:49 pm
I think I've come up with something positive.
If you are a European resident I have found cheaper car rental rates for visits to the US using European car rental sites. These rates often also include insurance (useful if you no longer have US car insurance as US credit cards do not cover liability insurance). You have to read the small print though as some of these rates are not valid for US citizens.
And even when available, the fact that one is a US citizen isn't the basis for the benefit, so I'm not sure it fits ....

Topic Author
wineandplaya
Posts: 74
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Re: Advantages for US persons abroad

Post by wineandplaya » Tue Nov 12, 2019 2:30 am

TedSwippet wrote:
Mon Nov 11, 2019 7:17 am
Back on topic ... is there enough material here for a wiki page? While there are a few small niche non-tax benefits, I count only a very few actual US tax advantages, and at least one of these, possibly two, are really just being able to avoid US tax nonresident alien disadvantages. If not a new page, maybe a short section in this page?
No, there probably isn't enough material for a wiki page. It could be good to point out that:

1. Most of the pitfalls can be avoided with some foresight and planning. So there is no need to panic and for everyone to try to sever all US ties.

2. Generally accepted best practices for US residents don't always apply if you plan to expatriate (e.g. always max out on Roth/HSA if you can). Your best course of action will vary by expatriation country and is subject to considerable legislative risk.

TedSwippet
Posts: 2514
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Advantages for US persons abroad

Post by TedSwippet » Tue Nov 12, 2019 6:54 am

wineandplaya wrote:
Tue Nov 12, 2019 2:30 am
No, there probably isn't enough material for a wiki page. It could be good to point out that: ...
Thanks, done.

typical.investor
Posts: 1260
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Re: Advantages for US persons abroad

Post by typical.investor » Tue Nov 12, 2019 7:27 am

Another “advantage” would be transferring appreciated shares to an NRA spouse if the spouse was resident someplace without capital gains.

There is a yearly limit but it’s relatively high to make up for the fact that the NRA spouse doesn’t get the same treatment as a spouse normally would in terms of inheritance.

bgreat
Posts: 108
Joined: Tue Jun 25, 2019 11:48 pm

Re: Advantages for US persons abroad

Post by bgreat » Wed Nov 13, 2019 1:28 pm

cbeck wrote:
Mon Nov 11, 2019 5:08 pm
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.
OMG no, this is a gross misunderstanding of how taxes work. You are conflating worlwide citizenship based taxation with rworldwide esidence based taxation.

Most countries tax worldwide income of their residents. The US is odd in that it taxes worldwide income of their citizens (even when not resident in the US), in addition to taxing residents. There are some countries who may only tax local income, but by and large most countries require declaration of worldwide income, and will tax such income.

After all, my dividends from US funds are taxed locally. The US may withhold some taxes, but my country of residence counts these dividends as income (but also credits the taxes that the US withheld).

The tax havens have other advantages, such as hiding your money from the tax authorities, and on the more legal side: special vehicles designed to reduce taxes.
ivk5 wrote:
Mon Nov 11, 2019 6:06 pm
Switzerland, where I live, certainly taxes its tax residents on their worldwide income, for those required to file a return, which includes Swiss citizens, permanent residents, and anyone with income over something like CHF 120k.

It’s true though that foreigners with earnings below the threshold have the option to accept the tax-at-source withholding as final without filing a return, which I think does have the effect of excluding foreign-source earnings.
First part is true: residents are taxed on worldwide income.

Second part is not true: income not covered by tax-at-source has to be declared separately even when under the 120k threshhold, and local tax authorities will send you a letter to confirm that you don't have such income (including foreign rental income, dividends, etc.). I believe that you end up doing the usual tax submission process in that case, but I'm not 100% certain anymore.

cbeck
Posts: 289
Joined: Sun Jun 24, 2012 1:28 am

Re: Advantages for US persons abroad

Post by cbeck » Sat Nov 16, 2019 8:10 pm

bgreat wrote:
Wed Nov 13, 2019 1:28 pm
cbeck wrote:
Mon Nov 11, 2019 5:08 pm
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.
OMG no, this is a gross misunderstanding of how taxes work. You are conflating worlwide citizenship based taxation with rworldwide esidence based taxation.
OMG, I stand corrected. Well anyway, I live in Thailand which taxes neither citizens nor residents on off-shore income. I recommend it.

7eight9
Posts: 436
Joined: Fri May 17, 2019 7:11 pm

Re: Advantages for US persons abroad

Post by 7eight9 » Sat Nov 16, 2019 8:20 pm

Following. Thnking of relocating to Thailand next year.
I guess it all could be much worse. | They could be warming up my hearse.

cbeck
Posts: 289
Joined: Sun Jun 24, 2012 1:28 am

Re: Advantages for US persons abroad

Post by cbeck » Mon Nov 18, 2019 12:05 am

7eight9 wrote:
Sat Nov 16, 2019 8:20 pm
Following. Thnking of relocating to Thailand next year.
Have you discovered thaivisa.com?

AlohaJoe
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Location: Saigon, Vietnam

Re: Advantages for US persons abroad

Post by AlohaJoe » Mon Nov 18, 2019 12:25 am

cbeck wrote:
Sat Nov 16, 2019 8:10 pm
bgreat wrote:
Wed Nov 13, 2019 1:28 pm
cbeck wrote:
Mon Nov 11, 2019 5:08 pm
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.
OMG no, this is a gross misunderstanding of how taxes work. You are conflating worlwide citizenship based taxation with rworldwide esidence based taxation.
OMG, I stand corrected. Well anyway, I live in Thailand which taxes neither citizens nor residents on off-shore income. I recommend it.
This isn't quite accurate. Thailand is more than happy to tax you on your global income

http://www.rd.go.th/publish/6045.0.html

The loophole is they don't assess the tax on money you don't bring into Thailand in the year you earn it. So if you earn dividends in January 2019, you have to keep that money outside of Thailand until 2020 or you will pay tax on it.

For some retirees that won't be a problem.

cbeck
Posts: 289
Joined: Sun Jun 24, 2012 1:28 am

Re: Advantages for US persons abroad

Post by cbeck » Mon Nov 18, 2019 8:01 pm

AlohaJoe wrote:
Mon Nov 18, 2019 12:25 am
cbeck wrote:
Sat Nov 16, 2019 8:10 pm
bgreat wrote:
Wed Nov 13, 2019 1:28 pm
cbeck wrote:
Mon Nov 11, 2019 5:08 pm
That would be surprising if true, because, unlike the US, European countries generally do not tax resident's worldwide income. I would have thought that transactions in the US would look to them like transactions in other off-shore tax havens, like the Isle of Man or St. Kitt's and Nevis.
OMG no, this is a gross misunderstanding of how taxes work. You are conflating worlwide citizenship based taxation with rworldwide esidence based taxation.
OMG, I stand corrected. Well anyway, I live in Thailand which taxes neither citizens nor residents on off-shore income. I recommend it.
This isn't quite accurate. Thailand is more than happy to tax you on your global income

http://www.rd.go.th/publish/6045.0.html

The loophole is they don't assess the tax on money you don't bring into Thailand in the year you earn it. So if you earn dividends in January 2019, you have to keep that money outside of Thailand until 2020 or you will pay tax on it.

For some retirees that won't be a problem.
That's technically correct, but in the online expat discussions I follow, no one has ever reported being audited on time of earning income we transfer into Thailand. Also, US social security is not taxed in Thailand and probably other pensions, although I am not sure on this point.

So, for all practical purposes Thailand does not tax either citizens or residents on off-shore income.

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