Foreign Pensions and Social Security: Retirement Expat Tax Advice

Foreign Pensions and Social Security: Retirement Expat Tax Advice
Updated on April 25, 2023

When US taxpayers move abroad, they generally do not consider the effects the move has on their social security benefits that are paid out upon retirement. This is usually because individuals do not understand how social security benefits are calculated and paid out in the first place. Social security is something most individuals just know they pay into and the contribution is reported on the W-2. This article will delve a little deeper into foreign pensions and Social Security benefits calculations, and provide expat tax advice on how to avoid reducing your benefits.

How are Social Security Benefits Calculated?

In order to qualify for US social security benefits, individuals need to earn credits; the number of credits an individual needs varies on the year of birth. Currently, individuals born after 1929 are required to have 40 credits, which is equivalent to 10 years of working.

Once an individual qualifies – the actual social security benefit is calculated. This is based on the level of earnings throughout the working period as well as the age of retirement of the individual. The higher the earnings and the later the retirement age, the greater the benefit that is paid out. The Social Security Administration offers calculators that can help individuals calculate the payout based on various factors, which may aid individuals in deciding when they would like to retire.

For individuals who receive wages from work abroad not covered by the US social security system, the formula is adjusted and the Windfall Elimination Provision reduces benefits.

What is the Windfall Elimination Provision?

The Windfall Elimination Provision (WEP) is a United States Social Security law that affects individuals who receive a pension from a job that did not pay Social Security taxes, such as some state and local government jobs or jobs outside the United States.

The US government decided it was not fair for individuals who earn wages not covered by the US Social Security system to derive the same Social Security Benefits as someone who has worked the same amount of time and contributed to the US Social Security System. For this reason, the government created the Windfall Elimination Provision, (also known as Windfall Elimination Program ) which reduces the Social Security benefit an individual may receive.

One of the provisions is the reduction of the US Social Security Benefit if receiving foreign social security payments or private pension payments. Generally speaking, the US benefit is reduced by $50 for every $100 of the foreign pension. This is very general and the actual reduction depends on the amount of wages and time spent working while not participating in the system.

The Windfall Elimination Provision also applies to individuals who held jobs that generally do not participate in the US social security, such as jobs in the private sector.

Does a Foreign Pension Affect Social Security

To evaluate whether benefits will be reduced the Social Security Administration has several other tests, one of which is the Foreign Work Test. The Foreign Work Tests dictate that benefits are to be reduced once an individual works over 45 hours in a month outside of the United States, whether as an employee or self-employed. Furthermore, those individuals working in a country that has a Social Security Agreement with the US, and therefore exempt from US Social Security, will be held to the test and have benefits reduced.

This test is not relevant to an individual that has already hit retirement age, or those who are still covered under the US Social Security system while residing abroad. This usually is the case when individuals move abroad but remain on a US payroll system (still employed by the US entity).

Even if the US Social Security System covers an individual’s foreign work, the benefits may still be reduced if earnings exceed an annual exemption amount (the amount changes annually). The reduction is generally equivalent to a reduction of $1 for every $2 above the limit. In the year an individual hits retirement age the reduction goes down to $1 for every $3 above the limit.

What if I Move Abroad After Retirement?

If individuals wish to continue receiving their Social Security benefits but reside abroad during retirement, they must research and carefully choose the location of retirement, as the Social Security Administration will not continue making payments to certain foreign jurisdictions. How long the residency abroad continues for, the location, and whether there are any Social Security Agreements with the said country all play a role in the determination, as well as the citizenship status of the individual seeking social security benefits. As such, it is advisable for the individual to seek professional expat tax advice. Further information with a list of the various countries may be found on our blog.

Need More Expat Tax Advice About Social Security?

If you are planning to retire abroad and need additional information, our blog has a page dedicated to retirees, along with foreign pensions and Social Security. It can help you answer the question: does a foreign pension affect Social Security? Additionally, there are a whole host of resources for you! As always, if you need help preparing your expat tax return, please get started with us today.

Who doesn’t love a tax break? Use our handy calculator to learn what you can save using the FEIE.

Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!

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