CHANGING YOUR RELATIONSHIP STATUS WITH THE U.S.?

 

 

If Instagram and TikTok are anything to go by, moving abroad these days is as simple as snagging a remote job and booking a one-way ticket to Barcelona. 

 

Of course, you, dear reader, would never make such a snap decision without researching to make sure your escape from the U.S.— excuse me, your move to Europe — was both legal and financially sound. 

 

Or would you?

 

The number of Americans moving abroad has increased dramatically in the post-pandemic years. And it shouldn’t surprise anyone that many decide to make the leap with the classic “figure things out as I go” mentality.

 

Unfortunately, this approach to moving to Europe does not mesh well with American finances. Although many countries such as Portugal, Spain, and Italy have created digital nomad visas, these legitimate immigration pathways come with unique considerations for U.S. citizens.

 

When U.S. citizens (or permanent U.S. residents) move to Europe, they risk complicating their ability to do many things, including work legally. Just because you have a remote job or can technically work from anywhere does not mean you can legally do so. 

 

U.S. workers need to clarify with their companies whether their Work From Anywhere (WFA) policy includes Europe. If a U.S. person is employed by a company while residing in Europe, that residency may trigger tax liability for the worker as well as the company.

 

Moreover, U.S. persons often need help filing their U.S. taxes and may experience challenges when opening a bank account. U.S. persons must file a U.S. tax return every year, whether or not they are living in the U.S. 

 

Many U.S. expats believe the tax-filing obligation is a gross government overreach. Two examples are the Foreign Bank Account Reporting Act (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Although both reports are administrative in nature, neglecting them can carry thousands of dollars in penalties and/or compliance corrections.

 

Applying the U.S. tax-filing requirement by citizenship dates back to the Civil War when a law was passed to prevent wealthy Americans from moving overseas and dodging taxes that were funding the government in the war to abolish slavery. Unfortunately, the tax filing requirement has not been updated to reflect the fact that moving abroad is now accessible to nearly anyone, not just wealthy tax evaders. Also, the laws still do not exempt low-earner expats.

 

 

 

 

Information about current tax laws that apply to expats may have to come from an expat service provider. Finding such qualified providers may present another hurdle. Prior to moving abroad, U.S. citizens and permanent residents should evaluate their residency options and personal goals. Do they want to live in one place for six months or more, or will a short-term visit suffice?

 

Americans enjoy free 90-day access to the Schengen Zone in Europe, covering 29 EU/EEA countries including France, Portugal, Spain, and Italy. However, after 90 days, Americans must leave the Schengen Zone and either move to a non-EU country or return to the U.S. 

 

Where long-term residency is the goal, digital nomad visa pathways may be a viable option, although not every country has them. That said, other government immigration programs or visa statuses facilitating legal long-term residency may be available. Some of these come with interesting tax incentives. 

 

Prior to leaving the U.S., Americans should open accounts on a currency conversion and money transfer platform such as Wise or Revolut so they can easily transfer and convert currency. Even when long-term residency in Europe is the goal, it often takes some time to open a local bank account – Americans pose administrative headaches for international banks.

 

Americans should speak with a cross-border tax professional before leaving. Tax professionals specializing in cross-border or international taxation may help explain the full spectrum of how your move abroad will affect your U.S. taxes. This includes whether you’ll still be liable for state taxes, how to ensure you qualify for certain expat tax provisions so that you don’t pay tax twice on the same income, and other details. Additionally, high earners and high net-worth individuals, couples, and families may benefit from a consultation with a cross-border financial planner. 

 

For those particularly interested in the digital nomad lifestyle, there is another consideration. Many people overlook the impact of Social Security laws and Totalization Agreements (or the lack thereof) when moving abroad. It would behoove a prospective digital nomad to research these topics carefully prior to leaving, as they often face not just income tax liabilities, but also a new Social Security liability in their new country. Your employer might have to contribute to Social Security via a local contract, which can be a huge issue. (Read: Most companies will likely refuse to do this.) 

 

This can make it much more expensive to employ someone in, say, Portugal than in the U.S. Naturally, this is an aspect of employment law and benefits that is both a surprising and unwelcome secret of being a digital nomad. That said, it’s worth noting that Italy is a notable exception to the aforementioned tripwires around Social Security: If you are an expat in Italy and self-employed or work for a US company, your Social Security obligation remains to the US.

 

Taken together, it’s important to consult with and then build a roster of qualified professionals with whom you can trust to answer your questions with respect to the countries you’re considering. You don’t have to understand every little in and out before making the leap, but being aware of key pitfalls could keep you from doing a metaphorical financial faceplant while living abroad. 

 

And take it from me—faceplants hit different when they happen outside the U.S. 

 

 

 

Claire Naughton knows what she’s talking about: she is an expat, writer, and consultant supporting U.S. companies for expat services. She also runs a blog, The Millennial Abroad, and is based in Strasbourg, France.