Many aspects of US expat taxes get overlooked by individuals living overseas. Filing requirements, deadlines, and valuable deductions and exclusions are commonly known, but what about Social Security? Expats often forget about the Social Security payments required for US citizens working overseas and are unaware that their benefits may be received in a foreign country. Below, 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 paid, and what to expect tax-wise.
Social Security and US Expat Taxes
Social Security is an area that commonly results in dual taxation because US citizens and Green Card holders are often required to pay into Social Security regardless of where they live or work. If an individual is working for an American company, both the employer and employee are required to make Social Security contributions. Also, self-employed entrepreneurs are required to pay self-employment tax on net income earned, paying into US Social Security.
The issue with this regulation is that many foreign countries also require individuals to pay into their social insurance systems 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 agreements with several countries to determine in which social insurance system an expat participates.
Social Security Agreements
The IRS and other US authorities do have 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.
As stated in the IRS article Social Security Tax Consequences of Working Abroad, “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.”
Countries Where Expats Can Avoid Double Taxation on Social Security
The US has Totalization Agreements with 30 countries, with Iceland and Slovenia 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.
While the agreements relieve double taxation for expats residing in those specific countries, there are still many who end up paying into both systems while only receiving one benefit. Agreements are in place with the following countries:
- Czech Republic
- Slovak Republic
- South Korea
- United Kingdom
How Totalization Agreements Work
The Totalization 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 expat was hired and their intended length of stay in a foreign country.
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. However, there are exceptions to these rules so expats should check the specifics of the Totalization Agreement with their host country.
Receiving Social Security Benefits Overseas
For expats retiring overseas, how to receive their benefits may be more of a concern than in which system they’re supposed to pay and participate. Eligibility for Social Security retirement benefits require 40 quarters of coverage (credits), or ten years of work and paying into US Social Security. 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, residency status, and the agreements between the US and the country in which you reside. All US citizens are eligible to receive Social Security benefits if they have paid into Social Security.
If you are not a US citizen eligible for benefits, payments stop after you have been outside of the US for six full calendar months unless you meet certain conditions or live in a country that has a Totalization Agreement. Benefit payments may be reinstated for non-US citizens who have been out of the country if they return to the US for a full calendar month.
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 US.
Due to sanctions, the Social Security Administration will not send payments to North Korea or Cuba. Social Security benefit payments are also usually held for persons in Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan, but exceptions can be granted. If you are a US citizen and are in Cuba or North Korea, or one of the restricted countries 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 US 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 US for at least five years, being entitled to benefits due to a worker who died while in the US military, or being a citizen of a country with which the US has a Totalization Agreement.
For more info, see the Social Security “Payments Outside the United States” tool.
Other Considerations About US Expat Taxes
The Social Security Administration requires that specific changes are reported to them, including:
- Change of address
- Return to work or improvement in disability
- Any work overseas
- Adoption of a child
- Dependents leaving your care
- Inability to manage funds
- Changes in parental circumstances
- Eligibility for a pension from work not covered by Social Security
- 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 that 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.
But That’s Not All
Social Security retirement benefits received will be considered taxable income on your US expat taxes regardless of location, residency, or citizenship status. These payments are not eligible for the Foreign Earned Income Exclusion, because they are not foreign-earned. 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.
While you may face dual coverage and therefore dual taxation from Social Security or 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. It is entirely possible that you can receive benefits from more than one country in retirement years if you meet each country’s eligibility requirements.
Questions About Your US Expat Taxes?
If you’re interested in learning more about social security and expats taxes, we have some great resources available on our FAQ’s page. Or, if you would like to speak with one of our expert accountants on how social security affects your expat taxes, we’re here to help!