Sure, if you won't owe, there isn't a need to withhold. However, are you sure the employer will withhold for federal taxes? They may not. But yeah, that'd be the same thing.Hello Bogleheads,
I’m seeking some guidance on my tax situation as I prepare for an international move. I’m a U.S. citizen, and my wife is a permanent resident, though she plans to surrender her green card at the end of this year. In 2025, I will continue to work as a W2 employee for a U.S. company while living in a country that has a flat 12% income tax rate. I’ll still have normal withholding taxes (Federal, FICA, Medicare), and I’m trying to understand how to best navigate the tax implications. Here are a few questions I’m hoping to get some insights on:
Foreign Tax Credit (Form 1116):
I understand that I may be able to use IRS Form 1116 to claim a credit for foreign taxes paid to avoid double taxation. Is this correct? Would it be acceptable to adjust my 2025 Federal tax withholding in my paycheck to account for foreign taxes paid, or should I wait until filing to claim the credit?
Have you considered the FEIE (foreign earned income exclusion) instead? When the foreign tax rates are low, the FEIE usually works out better (though it may stop you from making contributions to tax sheltered accounts unless you exceed it and have US taxable income).
Yes, you can make the election. If she has foreign income though, it will be drawn into US taxation. If she is below the FEIE, you could exclude hers that way.Filing Status:
Can I continue to file taxes as married filing jointly, even if my wife is no longer a permanent resident or U.S. citizen in the future? Would it be advisable to switch to a different filing status once she surrenders her green card?
I would want to avoid taxes and penalties on the gains. I didn't close my wife's IRA and ROTH when she gave up her green card. Years later, she regained residency and they are useful to have.Roth IRA Withdrawal:
My wife has a Roth IRA (Schwab), which we’ve fully contributed to for the past 3 years. We are considering withdrawing the full amount and paying taxes and penalties on the gains. Given that she’s unlikely to regain U.S. residency in the future, is there a better alternative to withdrawing, or would it make sense in our situation?
Schwab has an International Account that lets you use a foreign address. It gets complicated if you are in the EU/UK because of their restrictions on the sales of funds without certain documentation which the US funds you need for US taxation to avoid PFIC doesn't have. But you could surely hold her accounts there.
How will they know her non-resident status? In any case, Fidelity may freeze your account too. I am not sure how they will categorize you with a US employer but living overseas. Perhaps your company will give you a US address to use for that purpose.Joint Accounts:
My wife and I have joint checking and brokerage accounts (Fidelity). Is there any legal or practical issue with leaving her name on these accounts after she’s no longer a resident? I’m concerned about the possibility of an account being closed or restricted due to her non-resident status.
This one is fun. If you exclude your income under the FEIE and don't have US taxable income, can you still contribute to a 401(k)? Different people answer differently, but most I've heard from with a 401(k) in that situation did. The IRA contribution would not be possible though if using the FEIE.Future Retirement Contributions:
As an expat, I’m trying to decide if contributing to a 401(k) or IRA (beyond the company match) still makes sense given that future withdrawals in my new country may be taxed as normal income. Should I instead prioritize taxable accounts, or are there still benefits to these retirement accounts despite this potential double taxation?
Using the FTC, yes you can. You to look at whether the FTC or FEIE is better.
Should you? If the foreign country is just taxing withdrawals, then you can use the FTC on withdrawals in the future to offset paying tax in both countries and it just comes down to paying the higher rate. Make sure the foreign country won't want to tax dividends and capital gains on a yearly basis on US tax sheltered accounts.
I didn't have a US employer so my advice may reflect that but I would 1) want to keep tax deferred space for bonds and not cash in the wife's retirement accounts 2) figure out if the FTC or FEIE works better now and 3) look at what rates you'd have to pay on withdrawal to help decide.I’m also planning to consult a tax professional in my new country, but I’d appreciate any advice from the community or others who have been in a similar situation.
If you are 100% sure you will stay in the foreign country, that changes things a little bit as you probably don't want so much in USD and might prefer to have your wife's money or some money in the local currency (whether that be real estate, bonds, or higher allocation to stocks from that country). What about pulling her money after 59.5 but before RMDs at 72 to avoid a penalty by pulling it now? If you are retired your income will be lower. You may even want to convert some to a ROTH then.
Just be sure to use tax efficient ETFs like total market funds in taxable if you go that route.
Statistics: Posted by typical.investor — Tue Oct 15, 2024 10:41 pm