If you’re not planning to retire any time soon, you may not be thinking too much about Social Security. But Social Security affects everyone’s bottom line because you will be taxed your entire wage-earning career. Social Security taxes for expatriates can be even more important, as you could end up being taxed by two countries while working abroad! Whether you’re 20 years old in your first overseas job or 60 years old and thinking about retirement, we have outlined the 5 things you need to know about Social Security while living abroad.
1) Totalization Agreements Can Help Avoid Dual Taxation.
All US citizens (residing in the US or abroad) and Green Card holders, are required to contribute to the US Social Security system. This can have a huge effect on your expat taxes because many countries also require you to pay into their social insurance program to cover benefits you may receive while you reside in the country. This can result in a double-taxation, and nobody wants that!
To reduce the occurrence of double-taxation, the US has entered into Totalization Agreements with 24 countries. A Totalization Agreement helps determine which program an individual should pay into. Usually this is based on where the individual’s employment income is sourced. Other factors may be considered as well, such as where the individual was hired and how long they are expected to stay overseas.
If you are permanently working in a foreign country that has a Totalization Agreement with the US and your wages are exempt from US tax, you or your employer should get a statement from an authorized official or agency of the country to verify that your pay is only subject to the tax of the country you’re working in.
2) When You Retire Abroad You Can Still Receive Your Social Security Payments.
If you retire abroad, you are still eligible to receive your Social Security payments from the US. All US citizens can receive benefits outside of the country if they have paid appropriately into the US Social Security system. If you are not a US citizen, your benefits will stop once you have been outside the country for 6 months, unless you happen to reside in one of the 24 countries with which the US has a Totalization Agreement. If this is the case, your benefits will continue to be paid.
The Social Security Administration has a handy planning tool to ensure you are eligible to receive benefits while living outside of the US. Simply click here and answer the questionnaire and get an instant answer on your eligibility.
There are, however, a few countries in which you cannot receive US Social Security payments. Payments are prohibited to individuals in Cuba, North Korea, Azerbaijan, Belarus, Cambodia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam. Fortunately, you can receive all the Social Security payments you are entitled to once you return to a country where payments are not prohibited.
3) Social Security Payments May Need to be Reported on Your US tax Return.
If your Social Security payments are the only form of income you receive, you will not be required to file a US tax return. If, however, you have other income, such as income from a pension or you are still working, you will then need to file a US tax return and report these payments.
If you must file a US tax return, it’s important to understand that because these payments are US-sourced; they can’t be offset using the Foreign Earned Income Exclusion. If you are earning a significant amount of money overseas, this may result in you owing US taxes on a portion of your income. Social Security benefits are approximately 50-85% taxable, a progressive rate based on your income and filing status. In addition, Social Security payments may also be taxable in your host country depending on the country you are living in and your residency status.
4) The Foreign Work Test Could Affect Your Benefits.
Expats who retire abroad may also choose to continue working, especially if they have yet to reach full retirement age. While this may be an excellent way to supplement your income, beware of the Foreign Work Test. According to this test, if your earnings aren’t subject to US Social Security tax, your monthly Social Security benefit is withheld for any month in which you work more than 45 hours. It does not matter how many total hours or how much you earn.
If your foreign earnings are subject to US Social Security tax, you would be subject to the same reduction in Social Security benefits as those collecting benefits in the US prior to full retirement age. Under this scenario, if you are younger than full retirement age and earn over $15,120, the SSA will deduct $1.00 from your benefits for every $2.00 you earn (for 2013).
5) You Must Respond to the SSA When Contacted to Continue Receiving Benefits.
Periodically the SSA will send you a questionnaire to determine whether you are still eligible for benefits. It is important that you return that questionnaire to the office that sent it as soon as possible. If you fail to return it, your payments will stop. You are also responsible for notifying the SSA about changes that could affect your payments, such as a divorce, change of address, a return to work or an improvement in disability. Failure to do so or purposely making a false statement about your personal situation could result in you being penalized by a fine or imprisonment, as well as forfeiting some or all of your payments.