In this week’s episode of THE FINANCIAL COMMUTE, host Chris Galeski and Wealth Advisor Jon Wingent discuss international living and the financial uncertainties often faced by expats. Many expats may have questions about whether their contributions in another country will count towards their U.S. Social Security benefits.

The U.S. has Social Security treaties with many countries to prevent double taxation and ensure individuals receive the appropriate benefits. Systems can vary from one country to another, so it is important to research each nation and its terms. Expats who have contributed to Social Security-equivalent programs in multiple countries may be able to combine their work credits to qualify for benefits from each country. Jon and Chris also discuss the intricacies of international taxation and the need for careful planning when it comes to retirement accounts, investments, and titling/selling assets in different countries. Additionally, they stress the importance of distinguishing between domicile and citizenship in estate planning. It is crucial for expats and multinational families to consult professionals on these complex issues.

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Watch previous episodes here:

Ep. 59 Top Wealth Hacks & Tax Strategies of 2023

Ep. 58 Reviewing a Century of Investment Trends: Small & Large Companies

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Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor Jon Wingent.

Good to be here. It's exciting times.

We're going to talk about something pretty interesting in terms of your experience with coming over here from Europe to work in the United States and, you know, challenges and things that you've experienced, and also to help others. Before we even get to that, I think we should start by saying, you know, happy Thanksgiving to everybody.

I know we're grateful for the relationship that we have with many of you and, you know, wish your families all the best. So happy Thanksgiving and holiday season. Last week was really interesting. Inflation data came in a little bit lower than expected by, you know, a 10th of a percentage point. And the market just rallied three and a half, 4%.

Stocks were up three and a half, 4% to finish off the week, four straight days of gains. Gold held relatively flat. Bonds even, you know, came, yields came down a little bit. So it's interesting. We're still in this world of bad news is somewhat good news, although lower inflation is just more relieving. And I think maybe the market's tying in. Maybe the Fed won’t have to continue to raise rates and suffocate the economy.

It has been an interesting week in turn of late and interesting, as you were saying, that, you know, living previously in the U.K., where the time difference, maybe we were ahead by the hours, I feel like being in the U.S., I'm in the future a little bit because what happens in the U.S. tends to tell the rest of the world tends to lag and it catches up.

And similarly, in the U.K., inflation data had come down and there's been a subsequent rally. You'd often see a rally happen in the U.S. and then the rally would then happen elsewhere. So I feel I'm living in the future, maybe not by time difference, but, you know, I see what happens here. And then and then I see that get repeated. You know, back in Europe.

Our developed economies, there's a lot of similarities to them and there's a lot of reasons why, you know, why things that are happening here or there and vice versa affect one another, especially when it comes to supply chain and inflation, but not to go down a rabbit hole. I think we have a number of clients that either live here in the U.S. and go move overseas or even people that have come from overseas here to the U.S. And there is a whole host of things that people should be knowledgeable about when it comes to being an expat and living abroad or living here in the U.S. And you've been able to uncover a number of different key points that people should be aware of that that can help them. I mean, let's start with Social Security. I think you gave me a stat about number of different treaties or agreements that countries have in place to help with Social Security or how that works.

Yeah, I did. I did a post on this recently on LinkedIn because it is something that I experienced coming over here. So coming over here mid-career call it. I had been working, living and working in the U.K., contributing to the equivalent Social Security to that which is called National Insurance. And that's effectively that's the state or the federal pension, if you like, in retirement.

And coming here mid-career, I was thinking, well, you know, I've got all these contributions in the UK. Do they just kind of vanish into thin air? I come over to the U.S., I need to make 40 quarters of payments to get full Social Security. To qualify. So I did a little bit of digging and actually something that I found out was that the U.S. and I never knew this had arrangements with over 30 countries, not just the U.K., many, many countries. So if you have lived overseas for a period of time, if you are an American citizen that's gone and worked in another country and contributed to that scheme, that equivalent Social Security scheme, that actually can count as a credit towards your U.S. Social Security.

I love that difference in languages here. In the U.S. scheme is not the best word. Very special. But over in Europe, it's okay. So if somebody from the U.S. went to go work in another country and they were contributing to that country's, you know, similar Social Security type of plan, they would also get credit.

So they would get credit. Yeah. And they could utilize that. And actually, I and I've had this situations with clients. I was speaking to a client actually last week, and it was a fellow British person and they had moved over to the U.S. about 20 years ago but had a good ten plus years of contributions towards National Insurance in the U.K. and they were coming up to age to draw on their Social Security here and were concerned about the gaps.

But actually, it's actually very simple to go to your Social Security office and there's a whole bunch of information on it and you don't lose out. And importantly, you don't lose out on those benefits, you know, for your family as well. That might you might not otherwise have had.

So that was yeah, the terrible thing that I mean, not only were you, you know, bringing your family over here during a very interesting time of COVID and having little one, but you you were working mid-career. And so you've got that uncertainty in terms of, you know, what am I able to take with me and what am I potentially giving up?

So lots to think through. I mean, how did you how did you evaluate that when it came to you know, income and assets and a lot of the decisions that you or others might need to make? How can you help other people that are going through this?

So I think it applies whether you have worked internationally before or you might have the opportunity coming up to work internationally. So if you're listening to this and and maybe that's you know, your employer has international offices and is looking at doing a placement for a year in Paris, maybe. Emily In Paris, for example, to think about the the, the actual the differences between the two of those before you go to the other countries, either if you're coming to the U.S. or or going there, there's a lot of things that can be done. Often you will find these things out after the fact.

Well, to give you an example, different environments will have different types of plans and how they recognize how they approach, for instance, retirement planning. So if I think about in the U.K., for example, there is a there is a vehicle that it's really efficient, very attractive. What if I told you if you as you know, as an American going over there, if you were going over to London to work and somebody said to you, Chris, you could contribute post-tax money, you could do up to $25,000 a year into a portfolio that can grow tax free.

And guess what? You can take it out any time, tax free as well. So I don't have to weigh any thoughts on that. Very similar to a Roth. Yeah. But not like a Roth where you'd have a penalty if you did it before 59, 59 and a half. So that it's called an individual savings account. That's something that's really attractive in the U.K. And I had American clients in the U.K. that I used to look after expat clients.

And they love this is an investment portfolio, very tax efficient. But if you're an American, it's kind of pointless doing because it's not recognized here. You'd have to report it back if you had gains on that. U.S. is one of the very few countries in the world that taxes on worldwide income. So it's not efficient for a U.S. person to have an individual savings account in the U.K. Other countries will have similar schemes.

You can contribute to your Roth IRA back here in in the U.S. But I had an individual savings account. Had I known that it was not recognized in the same way, I think I would have reclosed that before coming over. You can still hold it, but then you have to report on it like a regular investment portfolio.

And if you have international assets, if you have an international portfolio, if you had an international bank account, you've got to follow the annual U.S. tax returns. So I would have to report or anyone that has a U.K. individual savings account living in the U.S. will need to report on that and report on the gains. It's not recognized as a tax.

So just to clarify, because it's fascinating and so interesting because I always say California was the one that likes to needle everybody with taxes, but maybe it's a little bit the U.S., right? So if you have an individual savings account in Europe and you're contributing to it, as long as you're living there, that money grows and you can take it out tax free.

But if you're a U.S. citizen and once you leave Europe and come back to the U.S. and you have money in that account, let's say if it goes from $25000 to $26000, you have to pay taxes on that thousand dollars in gains. You don't get that tax free shelter. Is that.

Effectively? Yes, you could. But there are. And something else we could talk about is there are dual tax treaties between countries. So so the U.S. and the U.K. is a very well-established dual tax treaty. The U.S. has treaties with a lot of countries, I think the 70 different countries that it has tax treaties with. But it's important to remember that tax treaties are really to benefit you as a U.S. taxpayer, U.S. citizen internationally, that you have credits against your U.S. income or you're not dual taxed, basically.

I mean, it's looking so you that dual tax. So if you went and got a job in London and you're being paid by an employer and you're paying income tax on those things like you would here if you're earning W2 and you pay income tax on it on that, that you're not taxed twice. So those treaties in place.

But the important thing is that there are different types of vehicles, not not schemes. Yeah, that's a word we use in the U.K. but plans that you've got to look at how they are recognized in each country. So the ones of the U.K., not that the recognized in terms of the IRS know what these are, but the treatment might be quite different, the same going the other way as well?

I mean, I use the circles going the other way.

So let's say you're somebody that's coming from overseas here to the U.S. or somebody from the U.S. going overseas. What advice would you give to them? Sort of like a checklist of things to look into before making that decision. So that way they're best prepared for what they're going into and then what they're walking away from and how that coordinates with other things.

Because there's so much going on here between owning assets, income, paying taxes, having retirement accounts, credits for Social Security estate, you know, estate situations, or more detailed estate planning, I should say. You know, walk me through some things that people should be aware.

Well, I think I'm in a fortunate position that I've been on both sides. I've been in the U.K. environment. I'm in the U.S. environment of advise in the U.K. And I'm advised in the U.S. But there are very few people that would understand both of those rate regimes. I mean, any and any and any detail. So if you work with a a tax preparer here, then you're going to need to work with a different tax preparer in that country that you are either going to or have have worked with or continue to work with that tax preparer.

I mean, if for example, if I'm married to it, to an American citizen and I'm a here to stay, my kids are dual citizens. But if I, for example, was, you know, a single person that I was living and working here in the U.S. like I am now, and I'm going back to the U.K., I would still need to file U.S. taxes.

So I'd still need a U.S. tax preparer for a number of years after leaving the U.S., they planning everywhere where we're wealth advisors, high planning is everything. You know, knowing things like I didn't know coming over here, like how an individual savings account would have been treated. You can make plans ahead of time. I'm working with a client right now who's looking to emigrate to Portugal, and we're working.

We had a call with a a CPA that does U.S. returns. So it's an office where they do U.S. returns and they also have team members in that same office that do the Portuguese tax returns. And we were talking through realizing, for example, realizing gains ahead of going because of the treatment from Portugal. So so there's different treatment on what a retirement account produces.

And Portugal don't recognize the difference between a Roth and an IRA, for example. Okay. So so we were having a we were having a conversation with my client, whether they should convert their IRA to a Roth conversion, you know, like we would do here in the U.S. And actually there was no additional benefit to doing that If they were going to emigrate to Portugal here in the U.S., that would be a benefit to them doing potentially.

Yes. So obviously, there's about to be the same or a lower tax bracket in the future.

Absolutely. It's about planning and some type of that's a situation where an emigration, they're retired. That's a life choice so that they're not looking to emigrate to Portugal to save taxes or to do some sort of tax strategy. They're doing it because they want to live their best life. And that's where they want to be. If you have lived and worked internationally, it might not necessarily be, because it's been a great dream to do it.

It might be because it's been the nature of, you know, you've got a job there and you like life. Who are those that would come over here, work in the entertainment industry or Silicon Valley.

But, you know, there are a number of people and clients that we talked to all the time that say, hey, you know what? When I retire, I want to spend, you know, five or six months here in the U.S. and maybe five or six months in Portugal or it or Italy or Argentina or other places like this is a common thing. You know, what roadblocks or pitfalls might they run into?

Well, assets is the big thing. Yeah. So assets is the big thing. What's your you know, do you intend to if you are retiring some or you're spending a period of time there, then you might not be Airbnbing for six months, you might want to buy some real estate. All right. So real estate transactions, the treatment of real estate is is very, very different.

So if I use the UK example in the UK, if your primary residence in the UK. So you might want to think about things like the titling of assets, this is where I'm getting to. So your primary residence, once you sell that there's no limit on the amount of the capital gain before it's taxable.

It's free from tax if it's your primary residence.

No wonder real estate is so expensive in certain areas.

But if you're a U.S. and international, that's for a UK. Yeah ‘cause it's your primary residence.

Now if you had a vacation home in Europe and if it was the same rules like, like like the UK where there's no capital gains and there are some countries like that, then you'd need to prove is it your primary residence? You have to think carefully about titling, so you might have, you know, might have, for example, a non-U.S. spouse as well.

That happens as well and families start to mix and kids might meet non-U.S. spouses and then got grandkids and that will call into play some careful consideration in estate planning. But in the in going back to the UK example, you know, we owned a real estate in the UK. My wife is a US citizen. U.S. citizens are taxed on their worldwide assets.

We had to think very carefully about titling of that of that asset because had our real estate appreciated by more than it was 250 at that time, because we're a while we're married couple we're not filing U.S. taxes married filing jointly my wife was finding as a single taxpayer. So it was a $250,000 exclusion. So, you know, had we sold that and real estate prices in London, you know, could move like that over a short period of time, then And there's there's a famous one with Boris Johnson, actually.

So he was born in New York and he sold a property in the UK that he owned, but he has dual citizenship, has U.S. citizenship as well. And the it was the IRS hit him with the tax bill because it was over $250,000 gain and Boris was selling his primary home. It's quite a famous case.

No kidding. Fascinating stuff. Yeah, John, I know that the the world of living internationally and coming in migrating to a different countries are here can cause a whole load of questions, confusion or even need for clarity. I'm so glad that we have you to help guide our clients and others around the lot of these discussions and, you know, serve as a framework for making this so, you know thank you for sharing a lot today and you know, hopefully we can help impact the lives of others that are trying to make some similar decision.

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Disclosure: Information presented herein is for illustrative and educational purposes only and should not be treated as legal advice. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, legal or tax advice. These views should not be relied on for the purposes of avoiding any federal tax penalties under the Internal Revenue Code. You should seek tax and or/ legal advice from your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances. Morton Wealth makes no representation that the strategies described are suitable or appropriate for any person.