The allure of living abroad can be irresistible — especially in one’s later years. In fact, hundreds of thousands of Americans choose to spend their retirements relaxing on sandy beaches, eating exotic food and learning a foreign language.
If you have similar aspirations, relocating to another country is certainly possible. Though to achieve and maintain the standard of living you desire, it is imperative you understand the tax implications of retiring abroad — whether overseas or even just south of the border.
Below is a brief tax guide designed for U.S. expats retiring abroad.
Do You Pay Tax on Pension if You Live Abroad?
Enrolling in a foreign pension plan does not exempt your income from U.S. taxes. The IRS generally considers pensions as taxable income, regardless of where the pension fund is located. However, the U.S. has set up numerous tax treaties and credits to protect expat retirees from double taxation.
Why Nearly Every Retired US Citizen Living Abroad Pays Taxes
Whereas many countries assess annual taxes based on residency, U.S. tax law is based on citizenship. This means nearly every American around the globe is required to file federal taxes annually if their worldwide income exceeds $12,000 ($400 if self-employed).
It doesn’t matter where you live or whether you already pay taxes in your host country. Nothing short of revoking your U.S. citizenship will shield you from having to report your global income to the IRS every year. This includes everything from pension distributions to stock dividends to rental payments if you own foreign property. Even bank account interest counts. Moreover, if you still own property or other holdings in the U.S., you may also be required to report state taxes — depending on local filing requirements in that jurisdiction.
What Taxes Do I Have to Pay From Overseas?
Because the IRS doesn’t care where you live, you’ll need to report the exact same details you’re already accustomed to filing as an American living in the U.S. What complicates the process is that moving abroad means you’re now technically living in two tax systems. Living overseas also increases the probability of owning foreign bank accounts, property or other assets that you wouldn’t necessarily have (or need to report) if living stateside.
As a result, expect to file more paperwork overall. This makes it all the more important that you keep paper and electronic copies of every receipt, deed, bank statement and financial report collected throughout the year — across your home and host countries.
As you manage your tax responsibilities from abroad, remember that the U.S. requires a federal tax return on all worldwide income, regardless of your new residence. Taxes for expat retirees include pensions, Social Security, investments and any other forms of income.
State taxes may also apply depending on your last U.S. residence. States such as California and Virginia track ties like property ownership and bank accounts to determine tax responsibilities. Cutting these ties and proving a permanent move abroad is essential to avoid state taxes.
Overseas, you’ll face local taxes in your new country, which could include taxation on global income similar to U.S. rules. This necessitates careful financial planning to manage potential double taxation.
To mitigate double taxation, the U.S. offers mechanisms such as:
- Tax Treaties: These agreements between the U.S. and other countries can limit taxation to one country.
- Foreign Tax Credit (FTC): This credit allows you to deduct taxes paid abroad from your U.S. tax obligation, reducing your overall tax burden.
Maintaining detailed financial records supports claims for credits and ensures compliance with tax requirements in the U.S. and abroad. Consulting with a tax professional familiar with expatriate issues is advisable to navigate these complex tax landscapes efficiently.
Will I Have to Pay Taxes Twice (at Home and Abroad)?
Although the IRS requires all Americans to report their global income, the U.S. has bilateral tax agreements with numerous countries designed to prevent double taxation. Thanks to the U.S. Foreign Tax Credit, any income taxes paid overseas reduces your U.S. liability by an equivalent dollar amount. You literally receive “credits” that you can apply to your next IRS tax bill.
How Does Social Security Work If I Move Abroad?
In most countries around the world, the IRS will tax Social Security payments — just as it normally does in the U.S. Exceptions to this rule include Israel, Ireland, Egypt, Germany and Canada.
How Will My Expat Pension Work Overseas?
Because most U.S. pensions and retirement plans are funded with “pretax” income, all distributions would be taxed normally (no matter where you live). Just keep in mind that if you own an IRA, you must begin taking out required minimum distributions (RMD) in the year you turn 70.5. Failure to withdraw this mandatory minimum could result in hefty excise penalties.
Can I Contribute to U.S. Retirement Accounts Abroad?
Yes, you can maintain U.S. retirement accounts while living abroad. However, contributions depend on factors like the account type and income source. Generally, contributions to 401(k) plans require U.S.-source income, while IRA contributions might still be possible under certain conditions.
Can I Transfer My Retirement Account Overseas?
Transferring a U.S. retirement account overseas is complex and often impractical. Most countries lack equivalent structures to 401(k)s or IRAs. Moreover, moving funds might trigger U.S. taxes and penalties. Thoroughly evaluate local options and tax implications with a certified professional before proceeding with such a transfer.
What Happens to Retirement Accounts If I Renounce U.S. Citizenship?
Renouncing U.S. citizenship doesn’t affect the status of your retirement accounts, meaning you can still access funds. However, distributions may be subject to a flat 30% tax. In addition, specific regulations apply, especially if your assets and previous IRS returns trigger exit taxes.
Is Retirement Income Taxable for Expats?
Yes, you must report retirement income to the IRS, as it is considered taxable. This includes withdrawals from 401(k)s and IRAs, which are taxed as regular income. However, certain tax treaties may reduce or exempt this tax, depending on the expat’s your country of residence.
What Are Financial Reporting Requirements for Expatriate Retirement?
Many of the IRS filing forms you’ve used in the past will still apply when moving abroad. Though you may also need to include additional forms, such as:
- IRS Form 1116, which is what you’ll use to claim the U.S. Foreign Tax Credit discussed earlier
- FinCEN Form 114, which is what you’ll need to complete your Foreign Bank Account Report (FBAR) if you have any overseas accounts exceeding $10,000
- IRS Form 8938, which is similar to a Foreign Bank Account Report. The main difference is that it is designed for financial assets exceeding $200,000
- IRS Form 2555, which allows consultants, freelancers and other self-employed expats to claim a Foreign Earned Income Exclusion for any income earned abroad (up to $100,000 annually)
Need Help Navigating Expat Taxes?
Navigating the U.S. tax code isn’t how most retirees envision spending their golden years. After all, the paperwork is confusing, the rules and exceptions are overwhelming, and the potential consequences of getting it wrong can be catastrophic.
Fortunately, you don’t have to go through all this alone.
At Expat CPA, we specialize in professional tax services for American retirees living all around the globe. Our expert team of certified public accountants is ready to guide you through the entire process, seeing that you qualify for every deduction and credit possible — while remaining compliant with the reporting requirements of all relevant foreign, state and federal jurisdictions. This includes helping you navigate the FATCA reporting the U.S. Treasury now uses to track (and punish) tax evaders.
If you’re looking to minimize tax liability while staying on the good side of the law, schedule a free consultation with one of our certified tax experts today.