Retiring and Your US Tax Abroad

US Tax Abroad planning for Retirement

As Americans approach retirement, many of them consider retiring in another country. We all know that retirement requires us to plan ahead. Retiring in another country requires even more thorough planning and fact-finding. Among the things you want to consider are your medical care, how living in another country will affect your Social Security and Medicare benefits, your Form 8854 filing requirements, and how your retirement income will impact your US tax abroad.

Medicare and Social Security Benefits While Abroad

Medicare benefits generally do not apply to medical care provided outside the US. You would be wise to assess your health care needs and the medical costs of living in another country. Your destination country may have a public health care system available to you, and you should check the availability and cost of private health insurance coverage for medical expenses incurred in other countries.

Unlike Medicare, your US Social Security benefits will be available to you in most countries as long as you continue to be eligible for benefits. However, the Social Security Administration is prohibited from mailing payments to you in certain countries. You will not receive Social Security payments when you live in Cambodia, Vietnam or countries that were in the former Soviet Union (some exceptions may apply). The Social Security payments that cannot be mailed to you while you are in one of these prohibited countries will be sent to you after you leave that country and go to a country where payments are not prohibited.

The Social Security Administration will determine your eligibility for benefits periodically by sending you a questionnaire. If you do not return the completed questionnaire, your Social Security payments will stop. It is important you report changes of address to the US Social Security Administration to make sure you receive their questionnaires. You can contact their Office of International Operations for more information.

If you begin to work in your destination country or live there long enough to qualify for that country’s social security program, your US Social Security benefits may be affected. You will either be under the US Social Security program, the program of the country you reside in or a combination of the two. Many countries have totalization agreements with the US Social Security Administration that govern whether or not you will pay Social Security taxes on the work you do in another country and on your Social Security benefits.

Unless you have renounced your US citizenship, you will continue to be required to file US tax returns after you retire in a foreign country as long as your worldwide income meets the US filing requirements.

Many countries have tax treaties with the US, and some treaties specify which country will tax your retirement and Social Security income. For example, according to the UK-US tax treaty, your retirement and Social Security income are taxed by the country you live in. If you retire in the UK, you will pay UK tax and not US tax on your retirement income. You may have to file a US tax return to report other income or to declare the tax treaty exclusions.

Renouncing US Citizenship and Form 8854

If you are an expat who has officially given up your US citizenship, you may have US filing requirements in your retirement years. If you came under the rules of Section 877 the year you renounced your citizenship, you may have to file Form 8854 and a US tax return to report your retirement income. Form 8854 is the “Initial and Annual Expatriation Statement.”

Being covered by Section 877 is based on the assets you owned and your five-year average income in the year you expatriated. It is possible for you to have no US filing requirements for years after you expatriate and then have to file US returns during retirement. If you are not certain when you will have to file US tax returns, you may want to consult with a tax professional and review your future US tax reporting requirements. It is much better for you to meet your US filing requirements rather than receive IRS notices and bills for past due taxes.

If you are considering a move away from the US to retire, it would be wise for you to include tax planning on your list of things to consider. A tax professional can help you work through the tax treaties and Social Security agreements that will apply to you, plus any related filing requirements such as those for Form 8854. Furthermore, estimating your US income taxes could help you budget and give you the tax information you need to make wise decisions in choosing the destination country for your retirement.

Questions About Form 8854 or Retiring Abroad?

Don’t miss our post on choosing the best retirement destination from a tax perspective. If you would like the assistance of one of our expat expert CPAs or IRS Enrolled Agents as you plan for your retirement, please contact us.

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