Wagner & Associates, CPA, LLC

Ah, retirement. Visions of endless sunny days, empty agendas and fists holding cool drinks may be dancing in your head. But before you pack up and say, “So long!” to the confines of your desk and home, a less exciting topic needs your attention: taxes. Whether you’re planning to retire on a white sandy beach in Florida or live abroad in a Mexican villa, it’s important that you understand the tax implications of your retirement possibilities. Here are several things to consider before making a move. 

Dual residency 

Maintaining two homes may sound like fun: One residence further north for the summer months and another residence further south during the winter months. It can be the best of both worlds. However, states view tax residency differently, and there are four things you need to think about before obtaining a second residence:

1. Determining residency

Most states consider you to be a resident if you spend more than 189 days (about six months) within their state lines per year. This is important to remember, especially if you’re cutting it close to that timeframe. 

2. Income tax

If you earn money in both states, you’ll most likely need to file returns in each. But don’t worry about double taxation. Many states offer credits for taxes paid to another state. 

3. Property taxes

Owning property in two states means you’ll be paying property taxes for both residences. Some states may provide homestead exemptions or reductions for primary residences, so it’s important to 

know which property you’ll claim as your primary. Check each state’s Department of Revenue website for specifics on homestead exemptions.

4. Estate taxes

If you’re thinking about passing down assets, keep in mind that some states have estate or inheritance taxes.¹ You’ll want to consider how these taxes can impact your beneficiaries.

Moving abroad

If you’re considering going international for your retirement (think: a picturesque coastal town in Italy or a serene beach in Costa Rica), taxes can get a bit more complicated. Here are four things to consider before retiring abroad.

1. US citizenship and taxes

Probably the most important thing to consider is that the US taxes its citizens on worldwide income, no matter where they live. If you retire to a beach outside the country, Uncle Sam still wants his share.² 

2. Foreign Earned Income Exclusion (FEIE)

If you earn money while living abroad, you may qualify for the FEIE.³ This exclusion allows you to exclude a certain amount of your foreign earnings from US taxation. But it doesn’t apply to pensions or retirement account distributions.

3. Double taxation

To prevent double taxation, the US has tax treaties with several countries.⁴ These treaties mean that if you pay taxes in your adopted country, you can often take a credit or deduction on your US return.

4. FBAR and FATCA

If you maintain foreign bank accounts, you may have to report them. The Foreign Bank Account Report (FBAR)⁵ and the Foreign Account Tax Compliance Act (FATCA)⁶ are two regulations that require US citizens to declare specific foreign assets and bank accounts.

Tips for a sunny tax future

Dealing with taxes isn’t as fun as a day in the sun. But a little planning can go a long way to ensure your retirement dreams aren’t dampened by unexpected tax obligations. Here are three tips to set your retirement up for sunny success.

1. Consult a tax professional

Tax laws are intricate and can change. It’s best to work with a tax expert who’s familiar with dual-state or international retirement residences.

2. Keep detailed records

If you decide to split your time between two residences, make sure you keep detailed logs of your days spent in each state. This will help quash any questions about your residency, should they arise.

3. Plan your estate

Whether you’re in two states or two countries, making a plan for your estate can save your beneficiaries unnecessary stress.

In the end, retirement is about relishing your well-deserved break. And with a bit of tax planning, you can focus on enjoying those golden years. Cheers to the sun and smart strategies!