There are many aspects of US expat taxes that get overlooked by individuals living overseas. Things like filing requirements, deadlines, and valuable deductions and exclusions are commonly known and reviewed, but what about Social Security? Many expats forget about the Social Security payments required for US citizens working overseas, and they often have no idea that their benefits may be delivered to a foreign country. In this article, we’ll explain what you need to know about Social Security and your US expat taxes, including what treaties are involved, where Social Security is to be paid, and what to expect in terms of taxation.
Social Security and US Expat Taxes
Social Security is one area of taxation that commonly results in dual taxation for expats. This is because US citizens and Green Card holders are required to pay into (and are covered by) Social Security regardless of where they live or work. If an individual is working for an American company, he or she is required (as is the employer) to make Social Security contributions.
The issue with this regulation is that many foreign countries also require individuals to pay into their social insurance systems in order to cover the benefits individuals may receive while living there. This means that many expats are taxed twice because they are paying into both their host country’s social insurance program and US Social Security simultaneously. To resolve this issue of double taxation, the US has entered into Totalization Agreements with over 20 countries, and these agreements determine which social insurance system an expat pays into. While this relieves double taxation for expats in over 20 countries, there are still many individuals who end up paying into both systems while working overseas.
So, who do you pay? As mentioned above, many expats are required to pay into two social insurance systems. The requirement to pay into US Social Security is not going to be removed just because a US citizen lives overseas. Unless an expat’s host country has a Totalization Agreement with the United States, he or she will be required to pay into their host country’s social insurance system as well as US Social Security. For this reason, Social Security is often a place where US expats see dual taxation on their income.
Social Security Agreements
Although many do not realize it, the IRS and other US authorities do have many measures in place to eliminate dual taxation for US citizens living overseas. Social Security Totalization Agreements are an example of how the US government attempts to reduce dual taxation on US expat taxes.
The United States has Totalization Agreements with 26 countries, with the Slovak Republic and Hungary being the most recent additions. These agreements are in place to reduce dual coverage and taxation for individuals working overseas and to close gaps in benefits coverage for those who may reside in the United States and another country. The agreements are between the US and a number of countries in Western Europe as well as Canada, South Korea, Chile, Australia, and Japan.
The idea behind these Totalization Agreements is to determine which programs an individual should pay into. These agreements are based on the territory rule, which determines where the individual’s employment is sourced. The agreements also consider other factors, including where an individual was hired and their intended length of stay in a foreign country.
Under a Totalization Agreement, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally make sure that you pay social security taxes to only one country.
IRS, “Social Security Tax Consequences of Working Abroad”
Generally speaking, the agreements indicate that an individual will pay into the social insurance of their home country if they are sent abroad on a contract or do not intend on staying overseas for more than three to five years. For longer term contracts or those who have no immediate plans to return, an individual will pay into the social insurance program of his or her host country. There are, however, exceptions to both rules.
For expats spending their retirement overseas, receiving their benefits may be more of a concern than which system they’re supposed to pay into. Generally speaking, you will be able to receive your Social Security payments while living abroad, but as with many aspects of US expat taxes, it does depend on your citizenship and residency status as well as the agreements between the United States and the country you call home.
All US citizens are eligible to receive Social Security benefits if they have paid into Social Security. If you are not a US citizen, your payments will be eliminated after you have been outside of the United States for six full calendar months unless you live in a country with which the United States has a Totalization Agreement.
If you reside in Country List 3 (the countries with which the US has Totalization Agreements), you will be able to receive Social Security payments no matter the duration of time spent outside of the United States. This only applies if you would be eligible for the same payments inside the United States, of course.
Due to sanctions, the Social Security Administration will not send payments to North Korea or Cuba. That said, if you are a U.S. citizen and are in Cuba or North Korea, you can receive any withheld payments once you arrive in a country where the SSA will send payments.
For those who reside in country list 2, you will receive the same payments you would in the United States unless you are receiving payments as a dependent or a survivor. If you are a dependent or survivor, you have to meet additional requirements, including residency in the United States for at least five years, being entitled to benefits due to a worker who died while in the U.S. military, or being a citizen of a country with which the United States has a Totalization Agreement.
It is important to note that any payments received from the Social Security Administration will be considered taxable income on your US expat taxes regardless of where you are located or your residency or citizenship status. These payments are US-sourced and therefore cannot be included in the Foreign Earned Income Exclusion. Benefits are 85% taxable on your US expat taxes and often bring a tax liability in foreign countries as well if the tax treaty between the two countries cannot be applied. You should discuss these liabilities with the embassy of that country in Washington, DC.
Other Considerations on US Expat Taxes
The Social Security Administration requires that certain things are reported to them in the event of various changes. These changes include a change of address, a return to work or improvement in disability, any work overseas, divorce, adoption of a child, dependents leaving your care, inability to manage funds, changes in parental circumstances, eligibility for pension from work not covered by Social Security, and death of an individual receiving Social Security payments.
Being overseas also increases the chance that your Social Security check may be lost or stolen. In this event, expats should contact the nearest US Embassy or the Social Security Administration directly. The SSA will then replace your check as soon as possible. A great way to eliminate the chance of a check being lost or stolen is to sign up for electronic payments.
US Expat Taxes and Social Security
While you may face dual coverage (and therefore dual taxation) in regards to Social Security and other social insurance programs offered around the world, bear in mind that you are entitled to your Social Security benefits as a US citizen regardless of where you live. One other benefit is that many overseas contracts include the payment of taxes, eliminating any burden on your income and taking care of your US expat tax obligations.
Questions About Your US Expat Taxes?
If you have any questions about how Social Security affects your US expat taxes, or if you would like to learn about our expat tax services, please contact us.