Well, here it is again. Known mostly for the American tax filing deadline, April 15th isn’t celebrated as the happiest day on the calendar but it is my birthday which gives me an opportunity to reflect on an exciting event filled year. Exactly one year ago, I turned age 50. Aside from the usual fanfare associated with milestones, it also marked the day Diane and I became eligible applicants for MM2H, the Malaysian Social Visit Pass that’s allowed us to live in Southeast Asia and begin our experiment in overseas early retirement. Almost a year later it’s been an interesting ride to say the least. Arriving with only four bags of clothes and some U.S. cash, we ventured into a place we’d never even visited and successfully negotiated our way through various hurdles including opening a bank account, finding a good property agent, signing a two-year lease in a luxury condo and setting up necessities like data plans, utilities and water delivery (very important in the tropics). Coincidentally, the blog enjoyed its best day of views ever on my 50th birthday thanks to a plug from a WordPress “Hot Off The Press” article about expats that I wasn’t aware of and it capped off the day perfectly.
Comparing last year to this one, it feels like we’re living in a different world. Although we stay very connected to the San Francisco bay Area through internet radio and streaming local news on the Ipads, we’ve grown accustomed to local issues like burning garbage, an annual haze event that affects 70 million people and the worst motorbike drivers on the planet. Trading two-hour commutes and high prices for two dollar lunches, leisurely strolls on the beach and three-week trips to places like Thailand and Australia, life became much more interesting when we left America. Unfortunately, one thing never changes. Rewarded for the privilege of U.S. citizenship by a superpower government designed to keep things as they are for the elites and a handful of banks, corporations and billionaires, the curse of April 15th follows you everywhere you move on earth and the first tax year as an expat becomes an enormous pain in the ass if you’re not ready. Fortunately, we’ve already been through this once as American expats in Canada expats so we already knew what to expect.
Besides the impoverished nation of Eritrea, America is the only nation on earth that taxes worldwide income. Simply stated, this means you’re taxed on all income earned anywhere on the planet even if you take that awesome oil and gas job in Indonesian Borneo. During our years in Canada, we paid a “cross border” tax specialist who charged way too much money but understood the multitude of forms you need to fill out when working overseas. Ridiculously, this meant filing Canadian Federal, Alberta provincial and U.S. Federal tax forms simultaneously every year before the April 15th. (Expats technically have an automatic extension for filing but they charge late payment fees and interest for any taxes owed if it’s paid after the deadline). Thankfully the IRS allows a foreign tax credit so you’re not paying taxes to both countries on the same income but that’s capped somewhere near $100,000 USD per year. Those lucky enough to earn more than that wind up paying double taxes on the amount over the foreign earned income credit. Are you starting to see why the U.S. government succeeds in its quest to keep most Americans in the homeland?
Applying to retired people as well as those still working, preparing for U.S tax season while living overseas usually takes the same diligence as working expats and sometimes more thanks to a hand of unfamiliar forms like Form 8938 (Statement of Specified Foreign Assets) which certainly applies to almost everyone since most expats need a local bank account. Then there’s FATCA compliance forms. Known technically as the Foreign Account Tax Compliance Act, generally only wealthy expats need to worry about filling this invasion of privacy that tracks every penny of your assets and forces all foreign financial institutions to file annual paperwork to a foreign nation. Clearly the entire FATCA legislation is illegal since the IRS has no legal jurisdiction over sovereign nations, yet almost every country on earth either bowed down for fear of political retaliation or simply stopped taking deposits from U.S, citizens. Normally only applying to taxpayers with combined foreign assets over $350,000, expat retirees on MM2H almost certainly fall in to the first year “expat trap” unless you move during the first 33 days of the year.
As penalties for those privileged humans known as United States citizens wishing to leave the homeland, the IRS writes pages of rules designed to make sure they get you good on the way out as well as following you to the grave. Intentionally writing exceptions to the above referenced FATCA income limits, the IRS says those living overseas but NOT passing one of two general tax rules for determining your “tax home” have different income thresholds when determining filing requirements for Form 8938 (Statement of Specified Financial Assets). The two accepted “tests” for determining foreign residency are the bona fide resident and the physical presence rule. In simple English, a bona fide resident is someone who establishes residency in a foreign country. Since all MM2H holders are ineligible for Malaysian residency and qualify as guests, that rule is always inapplicable. Meeting the physical presence test means staying in a foreign country for a continuous period of 330 days so anyone arriving after February 5th in a given tax year can’t meet that requirement either.
Knowing most expats are not wealthy and the bulk of people won’t move in the first 35 days of the year, the IRS lowers the income threshold requirements forcing people like Diane and me to file Form 8938. Naturally, most expat tax services charge extra for filing it and since it’s part if your 50 page expat tax package don’t bother trying to do it yourself unless you have specialized training in foreign tax preparation. Stating the rules, any taxpayer(s) with combined foreign assets valued at $100,000 USD on December 31st or $150,000 USD at any time during the tax year that doesn’t meet one of the foreign residency qualifications must file the form. Publishing an annual conversion chart on the last day of the year, the IRS requires foreign currency conversions using those rates and with erratic fluctuations versus the ringgit, we wound up holding a little too much in foreign assets after we made our fixed deposits and wired some cash for living expenses. The joy of U.S. citizenship came through with flying colors but fortunately, we still got large tax refunds anyway thanks to a system that rewards those smart enough to aggressively cut taxable income while still working.
Just in case the tax scenario described above isn’t confusing enough, there’s the new IRS Form 1095 (see above) designed to comply with ObamaCare’s bullshit rule forcing every American to own health insurance or face penalties when filing taxes. Arriving in our U.S. postal box a few days ago, a third-party responsible for tracking these things sends this beautiful form to the IRS and it features a bunch of codes designed to give the IRS information on your health insurance coverage. Breaking down your status on a monthly basis the codes explain if you have employer sponsored coverage at all and if it meets “minimum requirements“. Since we left America last May, Diane’s employer mailed that form and it shows no coverage for seven months. Amazingly, the rules about expats and health coverage read as follows:
U.S. citizens living in a foreign country are not required to get health insurance coverage under the Affordable Care Act. If you’re uninsured and living abroad, you don’t have to pay the fee that other uninsured U.S. citizens may have to pay.
If you’ve followed carefully, you probably noticed that the IRS doesn’t consider us foreign residents for the tax year 2015 because we didn’t meet the requirements. Fortunately, MM2H rules require that applicants buy one year of Malaysian health insurance effective from the day your visa is formally finalized and our very qualified expat tax specialist foreign deemed our foreign insurance policy from AIG enough to meet the ObamaCare rule.
Recently, I learned there’s an exception to the rule of the two guarantees in life; death and taxes. It turns out that U.S. taxpayers earning less than the amount of your combined standard deduction and personal exemption need not file a tax return. Well what do you know? With all our house money in fixed deposits earning that whopping 1% interest and 90% of our investment portfolio in tax sheltered accounts it looks like we may say bye-bye to the tax man at least until we’re old enough to start our small pensions. So all’s well that ends well and April 15th goes back to being just my birthday.