Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Retire Abroad Without the Tax Nightmare
Transcript
- Lucas: Let's start with a number. A couple living in Portland, Oregon, spending fifty thousand dollars a year — that's a modest, non-luxury lifestyle, maybe a two-bedroom apartment, a used car, eating out twice a week. Luna: That's tight in Portland in 2026. Rent alone is probably twenty-four thousand of that. Lucas: Right. Now take that same fifty thousand dollars and move it to Chiang Mai, Thailand. You get a modern one-bedroom in the Nimman area for six hundred dollars a month. Street food for two, three meals a day, runs about twelve dollars total. Massages are six bucks. Your fifty thousand suddenly feels like ninety or a hundred thousand in purchasing power. Luna: That's the geographic arbitrage play — lower cost of living means your withdrawal rate stretches further. But I think a lot of people hear that and immediately imagine early retirement in paradise without considering the tax side. Lucas: Exactly. And that's the trap. You can save thirty thousand a year on living expenses but accidentally create a twenty-thousand-dollar tax liability if you don't structure your move correctly. So today, let's walk through the three biggest tax pitfalls of retiring abroad — and how to dodge them. Luna: I want to hear the first one, because I suspect it's the one most people overlook. Lucas: The residency test. Most countries — and the US is a weird exception — tax you based on where you live. The US taxes based on citizenship. So if you're an American, you file a US tax return no matter where you live on the planet. But the country you move to will also want a piece. The key number is the 183-day rule. Luna: That's the standard threshold for becoming a tax resident in most countries. If you're physically present for 183 days or more in a calendar year, you're a resident and subject to their worldwide income tax. Lucas: Right. But here's where it gets tricky. Some countries use a different calendar. Thailand, for example, counts the calendar year. Portugal uses a rolling twelve-month period. And if you split your time between two countries, you might trigger residency in both — and then you're in treaty territory. Luna: Tax treaties. That's the safety net. Most countries have them with the US, and they determine which country gets first claim on your income. But treaties are slow to update, and they don't cover every type of income evenly. Lucas: Exactly. Capital gains, for example, are often taxed by the country of residence. Dividends and interest are usually taxed by the source country, but with a reduced rate under the treaty. If you don't file the right forms — a W-8BEN, a Form 8833 — you might end up double-taxed. Luna: Okay, so pitfall one is accidentally becoming resident in a high-tax country or in two countries at once. What's number two? Lucas: The foreign tax credit limitation. The US allows you to credit foreign taxes paid against your US tax liability, dollar for dollar. But the credit is limited to the US tax that would apply to that same income. So if you move to a country with a lower tax rate than the US — say, Portugal's flat 20% on certain pensions — you might still owe the US the difference. Luna: Portugal's NHR regime — the Non-Habitual Resident program — offers a flat 10% on many types of foreign pension income. But I've heard they're tightening that. As of 2024, they closed the loophole for certain passive income. Lucas: Correct. As of 2024, Portugal's NHR program no longer offers the zero or 10% rate on most investment income. So if you moved there thinking you'd pay zero on your dividend portfolio, you're now looking at the standard progressive rate — which can go up to 48%. That's a shock if you didn't plan for it. Luna: And the foreign tax credit limitation means you can't use excess credits from one type of income to offset another. It's a bunch of separate baskets. Lucas: General category income, passive category income — it's a mess. You can't take the credit from your Portuguese salary tax and apply it to your us source dividends. So you end up with stranded credits. And that's a direct hit to your after-tax cash flow. Luna: What about the foreign earned income exclusion? The FEIE lets you exclude up to around one hundred twenty thousand dollars of earned income in 2026. But that doesn't cover investment income. Lucas: Right. The FEIE only applies to wages or self-employment income earned while living abroad. Your dividends, capital gains, interest — those are excluded from the FEIE. So if your early retirement income is mostly from a portfolio, the FEIE does nothing for you. You need the foreign tax credit or a tax treaty. Luna: That's a huge point because a lot of early retirees assume, 'I live abroad, I don't pay US tax.' No, you still file. You still pay. It's just a question of whether you get to offset it. Lucas: Okay, pitfall three: the exit tax. If you're serious about moving abroad and you decide to renounce US citizenship — which some people do to escape the filing burden — you could trigger the expatriation tax under Section 877A of the Internal Revenue Code. Luna: That applies if your net worth exceeds two million dollars or your average annual net income tax liability over the previous five years exceeds a threshold — around two hundred thousand dollars for 2026. Lucas: And if you're covered, you're deemed to have sold all your assets on the day before expatriation. That means you pay capital gains tax on all unrealized gains — even if you didn't sell anything. It's a massive liquidity event. I know a case where a retiree had a portfolio of three million dollars with a cost basis of one million. The exit tax bill was over four hundred thousand dollars, and she didn't have that much cash. She had to sell assets at a bad time. Luna: That's brutal. And it's not just renunciation. Some countries have their own departure taxes. Canada, for example, has a deemed disposition when you leave. Australia too. Lucas: Yes. Even if you don't renounce US citizenship, if you move to a country with a departure tax, you could owe capital gains on the move itself. So the key is: don't just think about the cost of living. Think about the tax cost of the move itself. Luna: So what's the practical takeaway for someone listening who's thinking, 'I want to retire to Medellín or Penang'? Like, what do they actually do? Lucas: Step one: spend at least three to six months in the target country on a tourist visa before committing. Test the 183-day rule. Understand how the local tax authority counts days. Step two: restructure your portfolio before you move. Move your high-dividend stocks into tax-sheltered accounts if possible. Luna: But IRAs and 401s — the IRS treats them as domestic accounts. Some countries don't recognize their tax-deferred status. So you could end up with a foreign country taxing your IRA withdrawals even if they're not taxed in the US. Lucas: That's a real issue. A lot of US tax treaties include provisions for retirement accounts, but not all. For example, the us thailand treaty from 1998 says that pensions are taxable only in the country of residence — but it's vague on Roth IRAs. So a Thai tax authority could argue that a Roth withdrawal is taxable to them, even though you've already paid US tax on it. Luna: That's a nightmare. And you'd probably need a local tax lawyer to fight it. So maybe the smarter play is to keep your retirement accounts in the US and live off a taxable brokerage account that's structured for low turnover. Lucas: Exactly. If you can live off qualified dividends and long-term capital gains, many countries won't tax those — or at least not heavily. And you can use the foreign tax credit to offset any US liability. The ideal scenario: move to a country with a territorial tax system or a low flat tax on investment income. Luna: Which countries still offer that? Portugal's NHR is mostly dead. What about Malta? Cyprus? Panama? Lucas: Malta has a flat 15% on certain foreign income if you're a non-domiciled resident. Cyprus has a 20% flat rate on most income. Panama taxes only Panama-source income. But the compliance burden is real. You need to show that you're not just a tax tourist. Luna: And you need a good cross-border accountant. This is not DIY territory. Lucas: Correct. So let's circle back to the core idea. Geographic arbitrage is powerful. A couple with a one-million-dollar portfolio at a 4 percent withdrawal rate gets forty thousand a year. In Portland, that's a struggle. In Chiang Mai, it's a comfortable middle-class lifestyle. But the tax complexity can eat up half that advantage if you're not careful. Luna: And the point is not to scare people away. It's to make them realize that the move itself needs to be planned like a major financial decision — because it is. Lucas: Right. And it's worth saying: we do these episodes because we believe in financial independence as a tool for designing a better life. And we keep this podcast free of ads and sponsors because we think this information should be accessible to anyone who wants it. Luna: If our conversations have helped you think about your own plan more clearly, and you'd like to support that mission, there's a simple way. It's buy me a coffee dot com slash fexingo. No pressure, just a way to keep the episodes coming without commercial interruptions. Lucas: Exactly. And back to the strategy: if you're serious about retiring abroad, spend the two thousand dollars on a consultation with a cross-border tax planner before you move. It will save you tens of thousands — and a lot of headaches — later. Luna: And maybe start with a long vacation first. Test the coffee, test the internet speed, test the visa office. Lucas: Absolutely. Because at the end of the day, the best tax rate in the world doesn't matter if you hate where you live. The financial independence community sometimes optimizes too hard for the spreadsheet and forgets the lifestyle piece. Luna: Yeah, the whole point is to design a life you don't need to escape from. Even if you're escaping the winter. Lucas: Well put. So that's episode 73. Next time, we'll talk about something I've been getting a lot of questions about: how to handle sequence risk when you're living abroad and your expenses are in a different currency. That's a whole other layer. Luna: Currency risk on top of sequence risk — that sounds like a fun episode. Lucas: We'll do it.