Abroad in America

Why Your Tax Refund Could Be Costing You More as an Expat in America

• Jimmy Miller

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Many expats in the U.S. are told to focus on one thing when it comes to taxes: get the biggest refund possible.

But what if that advice is actually working against you?

In this episode of Abroad in America, we break down a critical misconception that impacts thousands of expats every year. While tax preparers play an important role in navigating a complex system, most are trained to think in short-term timeframes. Their goal is often to optimize your current-year return, not your long-term tax outcome.

And for expats, that difference can be costly.

We explore why strategies that look good today, like maximizing deductions or contributing to pre-tax retirement accounts, can create serious tax consequences later. Especially when you plan to leave the U.S. and take your money home.

Using simple examples, we unpack how tax-deferred accounts like traditional 401(k)s can act more like a loan from the IRS than true tax savings. You will see how taxes compound over time, how early withdrawal penalties work, and why many expats unknowingly set themselves up to lose a significant portion of their savings.

This episode also explains the key difference between tax preparation and tax planning, and why working with someone who understands both, especially in an expat context, can make a meaningful difference in your long-term financial outcome.

If you are living and working in the U.S. as a non-citizen or planning to return home one day, this is a conversation you cannot afford to miss.

You will also get a preview of upcoming episodes where we will dive deeper into strategies like Roth 401(k)s, Roth conversions, and how to potentially reduce or avoid unnecessary taxes and penalties when leaving the U.S.

If you know another expat who could benefit from this, be sure to share this episode with them.

Stay curious, stay open, and as always, keep exploring.

In This Episode

• Why maximizing your tax refund can actually increase your lifetime tax burden
• The difference between tax preparation and true tax planning
• How traditional 401(k)s can create hidden tax liabilities for expats
• Why deferring taxes is not the same as saving taxes
• The impact of early withdrawal penalties when leaving the U.S.
• How short-term advice can lead to long-term financial consequences
• What expats should consider before following standard U.S. tax advice

What’s Coming Next

• How Roth 401(k)s can help expats avoid future tax traps
• Understanding Roth conversions and the five-year rule
• Strategies for leaving money in the U.S. and using tax treaties to your advantage

SPEAKER_00

Welcome to the Abroad and America Podcast, the only financial podcast designed specifically for experts living in America, where you go behind the scenes with financial planner, author, and speaker, Jimmy Miller, to learn how to make your time in America. And it's financially rewarding. And now here's your host, Jimmy Miller.

SPEAKER_01

Welcome. Welcome to episode 13 of Abroad in America. Today we explore why the advice often given by tax professionals and some advisors as well may not be in your best interests in the long run, and especially if you're an expat here in America. Let's jump right in. Now, I don't have anything against tax preparers, and I have good friends who are in the tax industry. One of the best tax professionals I know, Nick at Revolve Tax, actually wrote the forward from my book, Divorce the IRS. Tax professionals are a necessity in our world where everything seems to have become so complex that you need a specialist to help, especially with taxes. And when you're an expat in America, it's even more complex because you're in a completely new tax system with different rules from back home. But I urge you to understand how most tax preparers think, in America at least, and why this thought process is usually not in your best interest. Many tax professionals are not even aware of the harm they are causing. It's just that they have never been taught to think about taxes holistically or have ever worked with expats. Now some tax preparers are also tax planners, but this is rare. It's a small distinction, but one that can make a big difference. It's usually best to work with a fiduciary financial advisor who is also a tax planner and preferably an expat specific planner with some understanding of the tax system in your home country on tax planning issues, and then take that advice to your tax preparer for them to execute. Let's discuss why. The tax preparation industry in America seems to have one goal each and every year to help you receive the largest refund legally possible on your tax return. Notice I did not say their goal is to help you pay the least amount of taxes. Your tax preparer may make this claim as well, but the question is one of time frames. They rarely consider that the largest refund this year might not be in your overall best interests and may lead you to paying more taxes over your lifetime, or when you decide you'd like to take your money home with you to your home country one day. Tax professionals in America tend to think in terms of the biggest refund in the current tax year and nothing else. They understand that most people feel happiest when they receive the largest possible amount of money back from their tax return, or at least pay the least amount to the IRS if they owe money. They equate paying the least amount of tax now with happiness. Tax preparation is a business and it's good business to make your customers happy, right? How else would they expect to get referrals and repeat business? Here's a secret though. Getting the most back from your tax return each year while you're here in America may not be in your best interest when considering your lifetime tax plan and how much you will pay the IRS when you want to take your money home with you one day. Most tax repairs consider a single tax year and not what happens when you leave America someday. Remember back from episode three when we talked about the three tax buckets and how they work, and that most Americans put their retirement money into the tax me later or tax deferred bucket. Because most expats in America tend to seek advice from the people at work about stuff like their 401k plan, most expats end up doing what the Americans do, putting their money into tax-deferred bucket investments as well. Because they think it will save them on taxes. And if an expat isn't getting their advice at work and instead asks a tax professional here in America, they'll likely get that same advice. And it's usually the wrong advice if you're not an American citizen or a green card holder. Would you take a loan from me today if I said you had to pay it back double later when you decide to move back home? That is with 200% interest. And then on top of the interest, you'd have to pay me a 10% extra service fee as well? Maybe you would. But in most cases, I think you'd agree it wouldn't be in your best interest to pay so much interest. Yet that is exactly what so many expats in America do when they put their money into their retirement plans at work pre-tax. They are not really saving any money on their taxes. They're just kicking the tax issue or payments down the road with a compounding effect that they don't think about. Many Americans will happily push their taxes off, or any problem for that matter, until later, not realizing that putting it off isn't like kicking a can down the road. It's more like pushing a wet snowball down a snowy slope. Don't do that to yourself. Let's take a look at an example. If you save a hundred dollars in a tax deferred account like your traditional 401k at work, and you're in the 20% tax bracket just to make the math easy here, you get a hundred dollar tax deduction from your taxable pay. That puts an extra twenty dollars in your paycheck. And that's great, you think. But the problem is that you didn't really save the full $100. You saved $80 and the IRS gave you a loan for that $20 that you'll have to pay back to them one day, probably when you leave America. Since you put your money into the pre-tax account for that tax deduction today, the IRS now has a lien on your $100 and they're gonna tax that money, just not till later, after it is grown. And they can take even more taxes from you. And for expats in America, it gets even worse if you want to take your money home with you and you leave before you're 59 and a half years old. Because if you do that, the IRS is not only gonna take the taxes on all of your money, they're also gonna take an additional 10% penalty tax on top of the other tax, just for taking it out of the account early, which means before 59 and a half years old in America. How the government and the IRS came up with that age is unknown to me, but that's the rule that you should be aware of. To dig a bit deeper here, let's consider what happens if your $100 grows while you're working in America to $200. If you're still in the 20% tax bracket when you want to go home and take your money out, you will now owe tax on the whole $200 or $40 worth of taxes. Do you really want to have an extra $20 in your paycheck today so that you can pay the IRS back $40 in taxes on the $20 loan they gave you now? But it doesn't stop there. On top of the regular tax, you will owe a 10% early withdrawal penalty to take your money home if you're under 59 and a half years old, which most expats are when they go home. And it isn't 10% on the $100 you originally put into the account. No, no, no. It's 10% penalty on what the account is worth when you take the money out. So in our little example here, you will pay 10% penalty tax on the $200 at the end, or an extra $20 of penalty tax on top of the $40 of regular tax. So that's $60 of tax and penalties on the $200 you take out of your $401 to take home with you. You only take home $140 of the $200. And that is if you're only in the 20% tax bracket, which actually doesn't even exist. It's just a good round number I used for this simple example. Many expats I have helped are in the 24 or 32% tax bracket, or they push themselves up into these tax brackets by taking the money out of their 401k to take it home. If you end up in the 32% tax bracket and the government adds another 10% tax penalty to that, you're going to lose almost half your money to the IRS on the day you leave America. The IRS won't even send you a thank you letter for all the taxes and penalties you give them. And not to add insult to injury here, but if you'd worked in a state that also has state taxes, and 43 of the 50 United States do, this gets even worse. And you might lose more than half your money to taxes once you also pay the state tax and the state tax penalty as well. Now I don't want to scare you off from working in America, and I don't want to stop you from saving for your future while you're here. I just want you to understand how things work here in America. Now, for some good news. This is a great strategy to use if you find yourself here in America with money already in pre-tax accounts. Finally, I'll have an episode about leaving your money in America when you leave and some of the benefits of considering the strategy so that you can take advantage of any tax treaty benefits you may be entitled to, and also remove any penalties that the IRS may be waiting to take from your accounts. So stay tuned for these three upcoming episodes where you'll learn in detail about how to make them work for you. In the meantime, share this episode with an expat here in America who could benefit from this advice.

SPEAKER_00

And remember, stay curious, stay open, and as always, keep exploring.com. And subscribe to the blog to stay up to date on YouTube's affecting experts. Don't forget to subscribe to never miss an episode. See you next time. Bayob Wealth and Payable Wealth Abroad at DBAs of Bayobab Wealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.