With so many other things to consider when moving abroad, thinking about Social Security might not have crossed your mind. However, it’s certainly a topic you should be aware of, as you will need to pay into Social Security while abroad. This article will break down the top facts you should know about tax treaties, how to pay Social Security and the effects on your working overseas tax.
1. You must pay into Social Security – no matter where you live and work.
Yes, it’s true – if you’re a US citizen or Green Card holder, you will need to pay into (and you’re covered by) Social Security whether or not you live in the US. If you work for a US company, you and your employer are both responsible for making Social Security contributions. This can lead to the issue of double taxation when it comes to your working overseas tax, as most foreign countries also require individuals to pay into their own social insurance systems as a way to cover benefits received while living there. However, there are a number of countries that have agreements with the US to prevent double taxation. Which leads us to the next fact…
2. The US has Totalization Agreements with 26 countries around the world.
As a way to mitigate double taxation, the US has entered into Totalization Agreements with 26 countries, which outlines to which social insurance system an expat should pay into. These agreements are based on territory rule, which determines where an individual’s employment is sourced. It also takes into consideration, such as where the person was hired and their intended length of stay in the foreign country.
This is great news if you live in one of these countries – but how about if you do not?
Unfortunately, this is an area where many expats end up facing double taxation, since without a Totalization Agreement, most are required to pay into two social insurance systems. Fortunately, though, with several methods for saving big on your expat taxes, you can still lower your working overseas tax burden significantly.
3. Receiving your Social Security benefits can be complicated.
Retiring overseas? You are generally able to receive your Social Security benefits while living abroad, but it ultimately depends on your citizenship and residency status in addition to agreements between the US and your host country.
If you’re a US citizen, you’re eligible for benefits if you paid into Social Security. If you’re not a US citizen, your payments will be eliminated after you’ve been away from the US for six calendar months – unless you live in a country with which the US has a Totalization Agreement. If you live in one of these 26 countries on ‘Country List 3,’ you can receive your Social Security payments regardless of the time you spent out of the US.
If you reside in a location on ‘Country List 2,’ you’ll be eligible for the same payments you would be in the US – unless you’re receiving payments as a dependent or survivor. In that case, you’d have to meet additional requirements, like residency in the US for least 5 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.
However, if you are currently living in Cuba or North Korea, the Social Security Administration cannot send payments due to sanctions. However, if you’re a US citizen in Cuba or North Korea, you’ll be eligible to receive any withheld payments once you arrive in a country where the SSA will send payments. You can read more about receiving Social Security payments in this article.
4. You will need to report Social Security payments on your working overseas tax.
No matter where you’re living or what your residency or citizenship status is currently, your Social Security payments will incur a liability on your working overseas tax. Also, because these payments are US-sourced, you can’t include them in your Foreign Earned Income Exclusion (FEIE) calculation. These benefits are 85% taxable on your US Tax Return, and you’ll find they often bring a tax liability in your host country as well.
Because of the complex nature of Social Security while living abroad, it’s always recommended to consult with a tax professional for expat tax advice. Looking for more money-saving expat tax tips? Download our tax guide for Americans working overseas for more information.
Need Help Understanding How Social Security Will Impact Your Working Overseas Tax?
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