We had treasured our experiences growing up abroad, and after having our first child, our longing to move to a different country—initially planned for our retirement—became insistent and urgent. We transitioned our practices to telemedicine; studied the various logistical challenges; and finally, in August 2020, we boarded a one-way flight to Portugal, having stuffed our entire life into two camping backpacks, two suitcases, two carry-ons, and a double stroller with our two young children.
Here we share five financial considerations that you must know before moving abroad.
#1 American Citizens and US Green Card Holders Need to File US Taxes, Even When Living Abroad
The US employs a citizenship-based taxation system, which means that US citizens are required to file US taxes based on all worldwide income, regardless of where they live. The only other country that utilizes a citizenship-based tax system is Eritrea. The rest of the world taxes its citizens only on income earned within their country of citizenship. Currently, the only way to avoid filing a US tax return is to renounce your US citizenship—a potentially expensive decision that should not be taken lightly.
#2 There Are Tax Treaties to Prevent Double Taxation
For Americans living outside the US, you generally need to file taxes in your local country of residence along with what you're paying the US government. This does not necessarily mean you will be double-taxed. The US has tax treaties with 68 countries, to prevent “double taxation” along with certain tax reductions and exemptions.
In general, you would pay taxes to your new home country and then claim this as a deduction when filing your US taxes. This deduction is called the Foreign Tax Credit, claimed by appending Form 1116 to your US tax return.
Additionally, the Foreign Earned Income Exclusion (FEIE) can reduce your US tax burden and varies based on yearly inflation. For tax year 2021, the maximum foreign earned income exclusion was $108,700 per individual and in tax year 2022, the maximum exclusion is $112,000 per person. For the 2022 tax year, a married couple can potentially exclude $224,000. That said, to claim the FEIE, you must either work full-time in a foreign country for an uninterrupted calendar year or be physically present outside of the US for at least 330 days out of a calendar year. You can’t claim the FEIE if you are traveling back to the United States to work locums shifts for a few months per year.
Prior to moving to Portugal, we had learned about Portugal’s Non-Habitual Resident (NHR) program, which was initiated by the Portuguese government to encourage the immigration of pensioners and high-value professionals, including physicians. Qualifying professionals benefit from reduced taxation on Portuguese-sourced income and with no taxation on most non-capital gain, foreign-sourced income, for up to 10 years. As such, our Portuguese income tax liability is virtually eliminated, while our US tax liability is significantly decreased because both of us are eligible for the FEIE, resulting in significant tax savings over the next 10 years.
Since we plan to stay in Portugal over the long term, the initial savings will eventually be compensated for by paying Portuguese income taxes—which, like US taxes, are based on income brackets. The Portuguese tax brackets quickly go up to 48% for a single income earning over €80,882 (equivalent to about $83,000), a stark difference compared to the current highest US bracket of 37% over $523,600.
That said, Portugal has a very low cost of living. Our monthly daycare expenses for two children, which were over $5,000 per month in a Boston suburb, are now less than €800 ($821) per month. The mortgage for our dream home is less than €1,500 ($1,540) per month, almost half of the rent of our small suburban Boston apartment. Given the significant increase in possible savings rate, seeking financial independence within the 10 years of the Non-Habitual Resident program can be very viable, and practicing medicine afterward can be pursued purely out of pleasure without worrying about tax burdens.
If you’re considering moving abroad, find a tax specialist with expertise in both the US and your new home country. It can be an excellent investment and prevent a lot of unpleasant surprises.
#3 Business Structure Matters
For those who continue to operate a business registered in the US while living abroad, it is very important to take a closer look at your business structure, as your business may be treated differently by your new home country than in the US. For example, the Limited Liability Company (LLC) is treated as a pass-through entity in the US, so that the income from the LLC is treated as the personal income of the owner. Some countries, such as Canada and Portugal, consider the LLC as a taxable corporation. In such a case, income earned by the LLC may be taxed by the Canadian government and taxed again by the US when passed through to the owner. Other business structures—such as a limited partnership, LLC elected as S-corporation, or others—may be more tax-effective based on the tax policies of your new home.
Thankfully, we had structured our businesses as S-corporations. S-corp income is not taxed in Portugal for individuals eligible for NHR status. Had we kept our businesses as LLCs, we would have been liable for up to 28% corporate taxes in Portugal.
Again, a tax specialist with expertise in both the US and your new home country should guide you to create a tax-efficient business structure for your specific situation.
#4 Take a Closer Look at Your Retirement Accounts
Roth retirement accounts are funded with post-tax income and grow without further US taxation. Not all countries will recognize the post-tax nature of Roth retirement accounts, such that, upon withdrawal of funds, you may have to pay taxes on the capital gains. Tax-deferred retirement accounts, funded with pre-tax income, may be taxed in full in your new home country and in the US when withdrawn.
The rules are not always clear. Our US-Portuguese tax specialist has advised us, strangely enough, that the rules around Roth accounts in Portugal have not been firmly defined, although this may change in the next 25 years before we are eligible to claim distributions at age 59 1/2 .
In theory, in Portugal, pensioners who have gained NHR Status are taxed with a flat 10% on capital gains from pensions—potentially including Roth distributions—and US Social Security. However, this would then create a Foreign Tax Credit, which can offset other tax liabilities to the US, such as a distribution from a tax-deferred account.
Since our NHR Status will expire by the time we can claim distributions from retirement accounts, we would in theory have to pay a flat 28% tax on the capital gains for a Roth distribution, which again could create a Foreign Tax Credit to offset other tax liabilities to the US.
#5 What About 529 Saving Plans?
We invested in a 529 investment plan when our children were born and did not know how to think about this plan while living abroad. Ideally, you will want to open a 529 plan while living in the US before moving abroad. Many 529 plans require the account holder to have a US address when creating the account. If you are already living abroad, you can get around this by having a trusted family member or friend open an account for your child. You could then contribute a recurring gift to fund the plan.
You can continue to invest in 529 state savings plans while living abroad, since most 529 investment plans do not require you to be a resident of a particular state. Some states offer state tax deductions as an incentive to invest in your own state’s plan. American ex-pats living abroad who do not file state tax returns would not benefit from the state tax deductions. Many prepaid tuition plans have state residency requirements for the account owner or the beneficiary, so typically, this would not be a good fit for Americans living abroad.
Importantly, withdrawals from a 529 can be used for eligible foreign institutions. These include many institutions in Canada, Mexico, the United Kingdom, France, the Netherlands, Poland, Sweden, Israel, Lebanon, South Africa, Egypt, Japan, Hong Kong, China, Australia, New Zealand, and the Caribbean. Read more about eligible educational institutions here. Importantly for us, there are currently no Portuguese schools that are eligible for payment from a 529.
The earnings portion of a 529 savings plan distribution may be subject to local taxes in your country of residence. One option to avoid local taxes is to have a family member or friend living in the US open a 529 plan for your child and then you can send recurring gift contributions to fund the 529 plan. If you already have a 529 plan, you can transfer ownership of the account to a family member or a friend residing in the US.
We thought that we were well-prepared before our move, having learned about the Portuguese Non-Habitual Resident Status, the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the need to continue to file taxes in the US. Yet we encountered a number of surprises after working with a Portuguese-US tax specialist, such as discovering that we had fortuitously set up tax-efficient business structures and the nuances around retirement accounts, where “Roth” doesn’t quite mean “post tax.”
We have had a few last-minute scrambles when we almost missed our deadline to apply for NHR or to file our Portuguese tax return. We don’t know for sure what the future holds—whether we will retire in Portugal, or where our little ones will go to university many years from now. This has made it harder to optimize our retirement savings and to plan for our children’s education. We have learned that no matter how well one prepares for a move abroad, there are always surprises—some pleasant, some unpleasant.
For physicians wishing to live abroad, make sure you educate yourself on these five financial considerations, ideally before your move abroad. For those wanting more personalized advice, we highly recommend connecting with an international tax specialist who has experience with both US taxes and the tax system in your new country of residence.
Are you thinking about moving to a new country? What have you learned about the potential tax and retirement account consequences? Would those consequences cause you to change your mind? Why or why not? Comment below!
[Editor's Note: Ashwini Bapat, MD is a palliative care doctor and founder of EpioneMD which provides virtual advance care planning and serious illness support to individuals who are aging or living with illness and their caregivers. Emeric Bojarski, MD is a Child, Adolescent, and Adult Psychiatrist and founder of Equilibrium Behavioral Health. Together, they are co-founders of Hippocratic Adventures, a community of US-trained physicians practicing and dreaming of practicing medicine abroad. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]