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What to Consider Before Relocating Overseas

Anchin Private Client CenterFebruary 24, 2021Alan Goldenberg - State and Local Tax Principal and Gwayne Lai - International Services Group Tax Director

What to Consider Before Relocating Overseas

COVID-19 has caused many to rethink where they want to shelter during quarantine and for how long. Those who have the option are moving away from densely populated cities and some are even considering a move out of the country. New Zealand alone, a country that has effectively eliminated COVID-19, has seen a 65% increase since May in the number of people looking to emigrate there. It is even an option for those with young children, given that many schools are operating remotely, thereby allowing students to learn from anywhere in the world as long as they have a WiFi connection.

If you are deliberating moving your family abroad, you are among many households that are considering a major change in lifestyle.

The biggest question, of course, is where do you want to move? New Zealand and Ireland, in particular, have seen significant spikes in views of their countries’ travel website pages since March of 2020. Puerto Rico is also a commonly chosen location due to its warm climate and tremendous tax benefits for U.S. citizens.  Regardless of the destination, if you are considering a move to another country, make sure to closely examine the long-term costs of living there– including medical care. Once you obtain that information, sit down and evaluate which location is truly right for you based on the following essential questions:

  1. Are you planning to buy or rent property abroad? Even if you loved visiting somewhere on vacation, that doesn’t necessarily mean that you will love living there full-time. Therefore, it is recommended that you rent before buying, and not put any money down until you have seen the property and neighborhood in person.
  2. What will you do about health insurance? Health insurance accessibility varies by country and your residency status in that country. Even if the country you are moving to has universal healthcare, check the requirements for non-citizens before you move.
  3. What is the process for applying for a residency visa? Although an American passport enables you to be a tourist in many countries, you generally will need a residency visa to stay in the country long-term, as well as to benefit from social programs.
  4. Will you open a local bank account? Having an account in a bank based in your new country of residence can make it easier to access funds without paying high transaction fees. Additionally, you have the advantage of being able to visit a local branch and speaking to a representative in person. If you do decide to open a bank account, check the Social Security Administration’s (SSA’s) list of non-U.S. banks that will accept direct deposits.
  5. How will you manage your finances and tax obligations that remain in the U.S.? Even if you are living abroad, as a U.S. citizen you will still have to file an annual return with the IRS. That means that you will have to report any and all taxable worldwide income that you have earned. Additionally, if you still own property in the U.S., you will owe property taxes on it. This can be confusing, so rest assured that if you need help determining your U.S. tax exposure, Anchin has experts in International Taxation and State and Local Taxation who can assist you.
  6. Will you be renouncing your citizenship? This is a decision that cannot be reversed. Keep in mind that you may have to pay an Expatriation Tax, commonly known as an “exit tax.”

If you do decide to relocate out of the U.S., you still need to contend with your state’s (and in many cases, city’s) residency and domicile rules to properly effectuate the change for tax purposes.

A change of residence from New York, for example, to a foreign country or other U.S. state can present a unique set of issues. For New York State and City personal income tax purposes, the concept of residency is reviewed by the Department of Taxation and Finance (“Department”) using two different standards, “domicile” and “statutory residency.” Taxpayers must demonstrate in clear and convincing fashion that they have abandoned their New York residence and established a domicile outside of the state or city before they will be considered a nonresident. Often, life-changing events, such as a marriage or retirement, garners more support for a purported change of residence.

Your “domicile” is the place that you intend to have as your permanent home. In other words, your domicile is where your permanent home is located. The Department provides a list of factors that, when reviewed, can indicate a change of domicile. Each primary factor is weighed individually and then collectively.

However, you can still be considered a New York “statutory resident” for income tax purposes even if your domicile is not in New York, but you maintain a permanent place of abode in New York for more than 11 months of the year and spend 184 days or more in the state during the tax year.

Below are some significant considerations when contemplating a change of domicile:

  1. Are you planning to sell your U.S. home? The clearest path to establishing non-residency in many states is to sell your home in that state and re-establish your life elsewhere.
  2. If you retain your U.S. home, what is your anticipated use of the residence compared to the use of the new overseas residence? In New York, the Department will compare the size, value and nature of use for taxpayers with multiple homes to establish their domicile.
  3. What is your pattern of employment? Establishing employment outside of your home state in any form will help bolster a change in domiciliary position as one tends to work in the location in which they primarily live.
  4. How much time will you spend overseas? In New York, the Department will evaluate the quantity of days spent in New York compared to your new place of residence. It is presumed that one spends far more time in their primary residence than in a vacation or secondary home.
  5. Where are your “near and dear” items located? Typically, items that have significant sentimental value, such as family heirlooms, works of art, collections of books, stamps and coins, wedding albums and those personal items that enhance the quality of lifestyle, will be found in one’s primary home.
  6. Did your immediate family move with you? Many states assume that the nuclear family unit – spouse, partner, and any minor children – live together in one location.

In addition to the above, it should be noted that New York has a unique three-part rule, known as the 548-Day Exemption, for those moving outside of the United States, as follows:

  1. You were in a foreign country or countries for at least 450 days during any period of 548 consecutive days; and
  2. You spent 90 days or less in New York during this 548-day period; and
  3. During the nonresident portion of the tax year in which the 548-day period begins and during the nonresident portion of the tax year in which the 548-day period ends, you were present in New York for no more than the number of days that bears the same ratio to 90 as the number of days in such portion of the tax year bears to 548.

Finally, some additional criteria to further evidence leaving the U.S. for a foreign country include:

  1. Gaining permanent residence in the foreign country. The act of applying, and gaining approval, for permanent residence in a foreign country signals an intent that is lacking in taxpayers who have temporary work visas which need to be renewed periodically.
  2. Filing tax returns as a resident of the foreign country. This action illustrates consistency with a taxpayer’s asserted change of domicile.
  3. Retention of a U.S. residence and periodic return visits. The retention of a U.S. residence to which the taxpayer regularly returns may suggest a lack of a fixed intention to abandon U.S. domicile.

It is important to note that whether or not a taxpayer acquires citizenship in the foreign country is generally of little consequence in and of itself for many states’ tax purposes.

These matters can be confusing and require careful planning, especially now, when so much is impacted by the ongoing effects of the COVID-19 pandemic. If you need help deciding on and implementing a plan to move overseas and establish residency in another country, reach out to our experts Alan Goldenberg, State and Local Tax Principal, and Gwayne Lai, International Services Group Tax Director, or your Anchin Relationship Partner.

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