Tax Considerations for Americans Retiring Overseas

Are you nearing retirement age and the prospect of retiring overseas is something that you are entertaining? Before you decide to go overseas to finally settle into your new life, it would be a good idea to consider the tax implications of retiring abroad.

Just because you decided to leave the United States does not exempt you from your tax obligations in the US. It is crucial to understand that while some retirees do not owe the US income tax, they still need to file an annual return with the IRS to report their worldwide income.

Taxpayers from the US who are retired overseas need to file tax forms in the countries in which they now live. If you are a retired expat, you may be able to get a deduction or tax credit for the income taxes that you paid to a foreign country. Thus, it can reduce the taxes that you pay if both countries–your home country and where you now live–tax the same income.

Income from Pensions or Social Security

As a retiree, your main source of income might come from your pension or social security benefits. Be aware that social security benefits are not taxable and so you don’t need to file an income tax return. When you get your social security benefit, you will receive a Form SSA-1099, which is a statement showing the amounts of your benefits. On the other hand, if you get a pension, you will receive a Form 1099-R for the distribution plan.

Retirement income is not taxed in other countries especially those that come from pensions and social security benefits but if you receive income from other sources such as a business or a part-time job, you need to report and pay taxes just the same.

How to Obtain Tax Benefits

If you are retired overseas but decided to take on a full-time job or open up a business, the IRS allows you to exclude all or a part of your income from the US income tax through the Foreign Earned Income Exclusion (FEIE). This means that you will not pay tax on up to $100,800 of your income–local and foreign earned.

Another tax benefit that you can get, to your advantage, is the tax treaties that the United States has with other foreign countries. Under such treaties, expats are taxed at a lower rate or are exempted from the US income taxes. But the reduced tax rate varies from one country to another.

You can also relinquish your US citizenship, which means that you cease to become a lawful permanent resident of the US. While this means that you no longer need to pay taxes–income and state taxes–in the United States, it does not mean that you give up your right in receiving a pension, social security, and other retirement income. However, the Internal Revenue Code (IRC) requires the social security administration to withhold alien tax from your monthly benefits.

Retiring to another country can be complicated, so before you decide to pack your things and move to another country permanently, make sure that you seek help from the right people. Let MKS&H help you understand about the tax implications of retiring overseas and what you can do to get the most out of your tax benefits. Contact us today!