Retiring abroad is more popular that ever, as Americans aim to maximize the healthcare and quality of life benefits available from their retirement income. A better climate and a sense of adventure are also factors leading many Americans to become late life expats.
US tax rules and filing requirements are the same for Americans living abroad as for those who live in the US, so retirement abroad can mean …
… filing two tax returns, one to the IRS, as well as one in an expat’s host country tax return (depending on the rules in that country).
Even if expats don’t owe any US taxes, if overall they have north of $10,000 of income, or just $400 of self employment income, they are still required to file a US federal tax return reporting their worldwide income.
Expats have an automatic extension until June 15th to file, with a further extension available until October 15th upon request. This gives expats who file foreign taxes extra time to reconcile the two returns, if necessary.
In this article we look at a range of tax planning implications and considerations for US expats thinking about retiring abroad.
Social security payments
Social security payments can be sent anywhere in the world, either by cheque or by bank transfer directly to a foreign bank account. They can also still be paid into a US account even if the recipient is living abroad.
Up to 85% of Social security payments can be considered taxable income by the IRS, depending on whether retired Americans have other income streams too. The details can be found here. Expats who live in Canada, Egypt, Germany, India, Ireland, Israel, Italy, Japan, Romania, Switzerland and the UK however are protected from paying US income tax on social security payments, if they claim the relevant provisions in the tax treaties that the US has with those countries when they file their annual federal return.
US and foreign pensions
Payments from US pensions such as IRAs and 401 (k) plans are normally considered taxable income in the US, and they may be in the country where expats are living, too, depending on the tax rules there.
Foreign pensions meanwhile are normally not considered taxable in the country where they are sourced, but they are by the US.
Income from other sources
“9 million American citizens reside overseas, according to the State Department. Nearlyhalf a million receive Social Security benefits while residing in foreign countries.” – Darla Mercado, CNBC
Other income sources such as rents, dividends, and earned income including consulting and freelancing are considered taxable income by the US, and may be taxable in the host country too (again depending on the tax rules there).
While the tax treaties that the US has with other countries won’t prevent expats from having to file US taxes, expats who pay foreign income tax can claim the US Foreign Tax Credit, which gives them a $1 US tax credit for every dollar of tax paid abroad. If they pay income tax abroad at a lower rate than the US rate, they will then just have to pay a little extra tax to the IRS to make up the US rate, but they will never have to pay more in total than the higher of the two rates.
Americans retiring abroad who still have any earned income perhaps from occasional freelancing or consulting work meanwhile can claim the Foreign Earned Income Exclusion to avoid having to pay US tax on up to around $100,000 of earned income.
Foreign Taxes
Researching the foreign tax rules in possible destination countries should be an essential part of planning retirement abroad.
Some countries tax residents on their worldwide income, while others just tax them on income sourced in that country. If the former, high income tax rates could have a significant impact on American retirees’ finances.
State taxes
Some Americans retiring abroad may have to continue paying state taxes if they retain ties to their state such as owning property or having investments or income there, or if they intend to return to live there in the future. Different states have different rules, so it’s worth researching these.
Property
Americans considering retiring abroad should also research the tax implications of owning or renting property in their destination country. For example, owning property may mean paying a property tax or a wealth tax, and because it’s often hard to obtain a local mortgage as a foreigner, owning property may also tie up a proportion of their wealth that could be more beneficially invested elsewhere. As such, renting a home may be a better option.
Consult an expert
Filing US taxes from abroad can be complex. As well as filing potentially having to claim tax treaty provisions and credits against foreign taxes, expats may also have to report their foreign bank accounts and investments. As such, we recommend that Americans considering retiring abroad should consult an expat tax expert to ensure that they fully understand the impact on their finances living abroad from a tax perspective.
Americans who retire overseas still have tax obligations. Typically, you will have to file a tax return with both the US government and your new host country. You may even have to file a tax return with the US state you used to live in.
What Happens If US Citizens Don't File Their Taxes While Living Abroad? US citizens living abroad who fail to file US taxes risk passport denial, penalties, and even criminal charges.
The Foreign Earned Income Exclusion, or FEIE, is also known as Form 2555 by the IRS. This expat benefit allows you to avoid double taxation by excluding up to a certain amount of foreign earned income from your US taxes. In 2024, for the 2023 tax year, you can exclude up to $120,000 of foreign earned income.
If you are a U.S. citizen or resident living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.
Each year, the limit on how much of your foreign-earned income may be exempt is adjusted for things like inflation. For the tax year 2022, the limit was $112,000 per person. For 2023, the limit was increased to $120,000 per person.
If you earned Social Security benefits, you can visit or live in most foreign countries and still receive payments. Look up the country on the SSA Payments Abroad Screening Tool to be sure you can receive your payments.
The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States. NOTE!
The US Exit Tax, or Expatriation Tax, is levied on individuals renouncing their US citizenship or green card. Governed by IRC Section 877A, this tax is specifically designed for high-net-worth individuals. It ensures that their worldwide income and assets are taxed prior to exiting the US tax system.
Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $112,000 (for 2022) of your foreign earnings.
Some American expats who work abroad may also need to pay US Social Security and Medicare taxes on their earned income. For example, self-employed US expats and those who work for a US-based employer must file an expat tax return. For the 2023 tax year, the rate for expat employees is 7.65%.
There is an exclusion ($821,000 for 2023 and $866,000 for 2024) available to offset the unrealized gain which is indexed for inflation. Any excess above the exclusion is taxed. There are a few exceptions to the covered expatriation rules.
As a U.S. citizen, moving overseas does not relieve you of your U.S. tax obligations. You may still be required to file an annual income tax return with the IRS, especially if you're drawing Social Security or taking retirement account distributions.
Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
Key Takeaways. Foreign pensions are generally subject to income tax in the US by the IRS. The rules for taxing a foreign pension will vary depending on several factors, including income tax treaties.
If IRS considers you to be a foreign person (or nonresident alien) for tax purposes, SSA is required to withhold a 30 percent flat income tax from 85 percent of your Social Security retirement, survivors, or disability benefits. This results in a withholding of 25.5 percent of your monthly benefit.
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