How Our Finances Changed When We Moved out of the United States — By Jennifer Shipp
Guanajuato Mexico North America Tips

How Our Finances Changed When We Moved out of the United States — By Jennifer Shipp

Few Americans consider moving across a border to change their lives.

Our family has been traveling for decades, but our home base has always been in the United States. We are, after all, citizens of this country. But the more we traveled, the more we started to understand what “citizenship” means and how the tethers we had to our native country and even our state (Nebraska) was actually hurting us financially. After moving to Mexico “officially” in January 2017, John and I have been studying the ins and outs of citizenship along with the realities of becoming full-time digital nomads and we feel lucky to have realized how leaving will make our lives better both financially as well as in terms of our health. We should’ve set up our “base” elsewhere many years ago.

We left in January thinking that we’d rent a house in Guanajuato, Mexico and then return to the states briefly a couple of times a year. We had businesses in the states, after all, including a couple of Taekwondo schools and a Halloween event that grossed around $50,000 a year total. Financially, we felt like these businesses did well enough for us financially to justify going back to the states for 6 weeks twice a year. Our original plan was to do this back-and-forth charade indefinitely. In the ‘tween times when we weren’t doing martial arts or working on the Halloween event, we both work online. John works freelance as a CTO, consultant, and Internet developer. I work as a medical writer (though I sometimes get hired to do non-medical projects too). Our primary income is from our online businesses. Martial arts and Halloween were both “fun” for us so we thought we’d just keep doing it indefinitely.

But then, I started reading about tax laws for expats. The definition of an expatriate is “a person who lives outside their native country”. The IRS doesn’t really use the term “expat” or “expatriate” to talk about taxing people who live outside of the United States. Rather, they talk about bona fide residency and the physical presence test. Some people leave the United States and become citizens of another country. When they’re residents of that other country for a full year, they’re a bona fide resident of that country according to the IRS. Some people (like John and I), leave the United States, but don’t become citizens of another country (at least not yet). We’re just living outside of the U.S. for more than 330 days of any 12-month period. We might be in Mexico for some of that time, but we might also live in Guatemala or Cambodia or Haiti over the course of 12 months. It doesn’t matter. We don’t have to be stationary. We just can’t go back to the United States for more than 35 days of any year in order to pass the physical presence test.

Passing the IRS’s physical presence test (or lack-of-physical-presence-in-the-states) appeals to us. We aren’t ready to commit to another country because we like to travel and our online work doesn’t require us to be in one location. We can move around and go virtually anywhere in the world except the United States during our 330 days of the year. As long as we do this, we qualify for the Foreign Earned Income Exclusion and possibly the Foreign Housing Exclusion and Deduction.

Understanding the Foreign Earned Income Exclusion is essential for digital nomads who are considering living their lives outside of the United States. U.S. citizens who meet the requirements of the physical presence test and live outside the U.S. for 330 days or more may qualify to exclude income up to $101,300 of foreign earnings.

For us, because we work online for clients all across the globe, our tax home is wherever we live. We don’t have a main place of business. We work from our living room, wherever our living room is in the world. There’s no brick-and-mortar office that we work through back in the states. John and I are both freelancers and contract workers. We work for multiple companies, but technically we’re self-employed. There are, of course, some details and caveats to the tax law that every digital nomad needs to consider in terms of their own specific situation. It’s smart to consult an expert in expat tax law. The book U.S. Taxes for Worldly Americans: The Traveling Expat’s Guide to Living, Working, and Staying Tax Compliant Abroad by Olivier Wagner was extremely helpful to me in understanding the tax laws for our family. It’s an easy read and it also includes some interesting advice about dual-citizenship and digital nomadism in general.

The life-changing part of the tax law for digital nomads is the Foreign Earned Income Exclusion (FEIE). We have foreign earned income because our tax home will now be in foreign countries. So we aren’t taxed on the first $100,000 or so that we make (the exact amount changes each year based on inflation). Wait: that’s not entirely true. We’re still taxed on Social Security and Medicare, but that’s only about 7%. This is fair because we don’t make use of the roads or the U.S. military per se. We aren’t using the U.S. educational system. So we aren’t taxed on this part of our income to make up for the fact that we aren’t making use of the potential benefits conferred to residents who are paying U.S. taxes. But the thing is, outside of the United States, if we live in a country that has a lower cost of living, like Mexico, Costa Rica, or Thailand, for example, our cost of living is so much lower that we don’t have to make as much money to survive and then someday “retire”. If we’re only taxed 7% on our income up to about $100,000, we can save more and work less.

It was on our last trip down from the states that I realized how that combination of a diminished cost-of-living coupled with special tax laws for digital nomads was a major game-changer. I’m still trying to wrap my head around how exactly our lives will change financially now that we’ve left the states. All I know right now is that we have a LOT of choices and options as far as what we want to do and how much time we want to spend doing it. We could go into a state of semi-retirement at any time if we wanted to (we don’t, but it’s nice to know that the possibility exists). Depending on the cost of rent here in Mexico, our monthly cost of living could be as low as $500/month. As Lydian nears her 18th birthday in March next year, she’s making plans to move out of the house and support herself right out of the gate. I mean, not that John and I are worried about supporting her at a cost-of-living that’s as low as $300-500/month for a single person, but she LIKES the idea of supporting herself. She knows we’re a safety net, but she’s excited about the possibility that she could support herself on her own.

Dealing with State Taxes

In Nebraska, we’re taxed at about 6-7% on our income (as of 2017). In order to avoid being taxed by the state (since we aren’t using any of the state’s services, after all), we have to sell our house and change residency to a state with either lower or non-existent state taxes. We decided to move our residency to Texas since there’s no state income tax there and there are companies like the Escapees RV Club that allow us to set up residency there easily. They have a “domicile” program that works in tandem with their “mail forwarding” program and though it’s designed for full-time RVer’s, it works well-enough for digital nomads, like us, as well.

We had to first join the Escapees RV Club and then decide which state we wanted to claim for our residency. We chose Texas. Then we filled out the Escapees paperwork including Form 1583 to change our postal address. We got our paperwork notarized by a notary here in Mexico (there’s one who lives next door). I had to call Escapees at least 3 times to ask questions and clarify the process even though there are instructions provided. On our way back to the states on our final trip next week, we’ll stop and get our vehicle inspected and registered and then get new Texas driver’s licenses. Today, I received our new Texas address in the mail and we’ll use that to get car insurance in Texas. We’ve been working on this process for the past 3 weeks, but now it’s finally starting to come together. And it’s worth it to save an extra 7% on our income taxes each year.

Of course mail forwarding is also important and we’d heard that the best mail forwarding service for digital nomads was Escapees. Our mail gets forwarded to our new address. We get an email notification when we receive mail and if we’d like to have some of it scanned, we can have them do this for only $10/month. We can also have Escapees forward our mail to another address either overseas or to a location in the states if we want.

Health and Healthcare Outside of the U.S.

There were a lot of reasons why we left the states in January. The election of Donald Trump was one of them, of course, but not the main reason. I’d spent a lot of time talking to people about the election and although he’s an embarrassment for all Americans, it’s more or less that he represents an ailing civilization. I mean that both literally and figuratively. One of the biggest reasons why we decided to leave for good had to do with the combination of two things: Shitty, Expensive Food and Poor Healthcare. We’d been talking about these problems for a long time and John and I finally realized that we couldn’t fix this problem for ourselves from inside the United States. Our grocery bill each month was up to $1300 because we were buying mostly organic fruits and vegetables. And our health insurance (for our family of 3 very healthy people who hardly ever visit the doctor in the United States) was going to go up to $1400/month starting in January.

In Mexico, our grocery bill runs about $160/month. We don’t have health insurance right now, but I’ll probably look into Integra Global when we get back from our final trip to the states. While we’re in Mexico, insurance probably isn’t necessary through Integra at $150-250/month (about 1/10th to 1/5th of our health insurance costs in the United States). Integra Global would cover us in every country in the world except the United States for this low monthly charge. To be covered in the U.S., the cost would be more than double. But healthcare in Mexico is so cheap, it doesn’t seem worth it to pay for health insurance right now. I feel like I need a break from thinking I need insurance for every little thing. Insurance is a very American thing and I’m kind of sick of it (no pun intended).

Healthcare is something that I spend a lot of time thinking about because I’m a medical writer. But even with all the thought, research, and writing I’ve done about different aspects of the U.S. healthcare system, it wasn’t until this winter that I finally realized how much I feared a major health issue when we were in the states. My mom ended up in the hospital for an intestinal aneurysm in November last year and the care she received was sketchy. At times it was superb, at others it was horrible. And both the superb and the horrible treatment cost so much money that it would easily bankrupt the average American. Until my mom went to the hospital and I watched what was going on and actually got involved with it, I really didn’t realize how far gone the U.S. healthcare system is. Getting sick or injured in the United States destroys families financially on a regular basis. And what’s silly (or sad) is that most Americans don’t realize how poor the U.S. healthcare system is in comparison with healthcare in other countries (both the developed and undeveloped ones). Most Americans think hospitals outside of the states are going to be dirty, primitive, and unsterile.

A few brave Americans are starting to tap into the growing trend of Medical Tourism (purposeful travel to other countries for cheaper, better healthcare). The thing is, in Mexico, health care costs are about 40% less than in the United States. About 200,000 Americans each year go to Mexico specifically to seek affordable treatment because even though it costs 40% less, it’s roughly equal to the United States in terms of quality of service (as measured in terms of mortality or complications). In nearly every major Mexican city, there is at least one hospital that has international accreditation. It’s hard to believe it until you see it, but I’ve seen it. Healthcare in the states sucks hard. I’d rather fall seriously ill in Mexico or Thailand, thank you very much.

The cost of healthy foods like fruits and vegetables is so much lower in Mexico than in the United States, I have a hard time believing it. And the produce comes into the vendors each morning fresh from the fields rather than traveling thousands of miles to reach the grocery store all covered in wax so that it looks “perfect” (even though it rots in only a few days). It’s easier to be healthy here. In fact, it’s easier to be healthy in a most countries outside of the U.S. In Nebraska, surrounded on all sides by fields of corn, wheat, and soybeans, we lived in what’s known as a “food desert”. It’s nice to be in Mexico where I can walk down the street 400 meters in nearly any direction and end up at a small food vendor with affordable fresh fruits and vegetables.

And the healthcare system in Mexico doesn’t scare me. I don’t live in fear of bankruptcy from an unexpected health issue. When John and I get older, we can hire someone to do home health rather than worrying about long-term care facilities. Home health is affordable here. There’s no way to plan that far ahead in reality, but in the U.S., we have to plan ahead because everything there is so expensive.

How will all these financial changes make our lives better? It’s hard to say, but after 6 months in Mexico, I have no regrets. It’s the first time in years that I’ve felt free of financial anxieties since I was 13 years old. What will I think about if I’m not always worried about money?

I’ll let you know…

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