US Tax for Expats and the Top 5 Most Expensive Countries for Americans Abroad

US Tax for Expats: Top 5 Most Expensive Countries

Choosing to move abroad and experiencing a new culture come with exciting, but big, changes in your life. If you’re in the planning stages of expatriating, you may be trying to determine the best location to begin your adventure – which can include researching a number of factors, including cost of living, exchange rates and, of course, US tax for expats. Here, we’ll share the top five most expensive places to live as a US expat and why they fall into this category.

Why Certain Areas are More Expensive for US Expats

When it comes to the cost of living in a particular area, there are multiple factors that influence how expensive it will be to live there. It’s important to look at the big picture when making such an important decision, as basing your decision on a single factor (like US tax for expats alone) could lead to a significantly higher cost of living than you anticipated.

  • Exchange Rate: Get a feel for the currency of another country to see if the current rate favors the foreign currency over the US dollar. If this is the case, your dollar won’t go as far when you move abroad (1 USD < 1 base unit of foreign currency). This alone will probably not be the deciding factor, but keep in mind that the dollars and cents will add up quickly if the US dollar is weaker than your foreign currency.
  • Cost of Living: This is largely dependent on the population of the area you’re considering due to supply and demand. The balance of housing costs, food costs and availability and water supply have a significant impact on the cost of living – and competition tends to drive these prices down. So, in some cases, you’d find that living in a densely populated city could come out less costly than living in a rural, sparsely populated area.
  • Tax: This is a multi-faceted factor that affects the cost of living in a particular area. Generally, the US has one of the lowest effective tax rates of tax worldwide. Most of the world taxes income progressively, which means it’s important to consider not only the rates themselves, but the number of rates available and their transition points. You’ll also want to do your research to determine the availability of exclusions and deductions, tax on investments, social taxes, and consumption taxes. Also remember, filing a US Tax Return will impact you as well. Some factors may lead to inflated income when stated in US Dollars for US tax purposes, which means your US taxable income could bear a higher marginal rate of tax. It’s recommended that you consult with a professional for expat tax advice before moving abroad, so you can fully understand and prepare for your tax obligations ahead of time.

Most Expensive Places to Live Based on These Factors

1. United Kingdom  The UK’s exchange rate is the least favorable of all world currencies – surprisingly, even after the GBP’s Brexit-related stumble. Couple that with outrageous housing costs (especially in urban areas) and high taxes, and you’ll pay a pretty penny to live here. As a high tax jurisdiction, the UK’s marginal tax rates are higher than those in the US for non-investment income (fewer brackets and higher rates), there are very few deductions allowed against taxable income and there is a strikingly high 20% Value-Added Tax (VAT) on most transactions. Because of these factors, it usually means you’ll have a higher marginal US tax rate.

2 & 3. Finland and Sweden These two countries actually tied as the second-most expensive places for US expats. While housing costs are generally reasonable, food and transportation costs are significantly higher (upwards of 33%) than most of the US. They are also among the highest taxing jurisdictions in the world with high social taxes (20-30% compared to the US’ 7.65%), a VAT of 24-25% on non-food items, and marginal income tax rates often in excess of 50% with minimal deductions allowed.

4. Japan – Here, the cost of living is the big factor that makes Japan such a pricey place to live. There is an extremely high cost of living due to limited arable and livable land and high population density. The economy is export-heavy, which devalues the local currency. While this leads to a favorable US Dollar exchange rate, it means the local purchasing power of the Japanese Yen is limited. Local taxes here could be higher or lower than in the US, depending on income level, but the adjustment in salary for the high cost of living can inflate marginal US tax rates.

5. Germany Housing costs here tend to be on par with those in the US, but can be substantially higher depending on the area. Other costs of living are comparable to the US, but this alone shouldn’t be your deciding factor in terms of moving to Germany, as income taxes here are generally higher. The marginal tax rates are higher here and there is a solidarity surcharge (5.5% ostensibly promoting the reunification of East Germany), which makes the effective marginal rates significantly higher. Also, social taxes in Germany are much higher, to the tune of 20% employee contribution vs. only 7.65% employee contribution in the US. There is also a 19% VAT on non-food items. If you do live in an area of Germany where the cost of living is higher, you’ll find that adjustments to your salary to reflect the cost of living difference will inflate your US marginal tax rate.

In addition to these cost-related factors and US tax for expats, you’ll want to ensure the culture is a good fit for you. Taking a well-rounded approach when determining the best place to live can have a big impact on your overall experience abroad. When you’re ready to move abroad, be sure download a US expat tax guide to help you understand your obligations in terms of US tax for expats.

Need Help Understanding Your US Tax for Expats Requirements?

When you’re ready to discuss your US tax for expat questions, we’ll be here to help you every step of the way. Our expat-expert CPAs and IRS Enrolled Agents have a wealth of expertise and we’re here to make filing expat taxes a more hassle-free experience for you. Contact us today!

Was this helpful?

Thank You!

More in Topic