Retired Abroad Tax Guide for Americans
- What Taxes Will I Have to Pay If I Retire Abroad?
- Are Expats Taxed on Retirement Income?
- Will I Have to Pay Taxes Twice if I Retire Abroad?
- How to Avoid Double Taxation When Retiring Abroad
- Renouncing Your US Citizenship and Retiring Abroad
- What Other US Tax Obligations Do Expat Retirees Have?
- US Tax FAQs for Retirees Abroad
- Are You Planning to Retire Abroad? We Can Help with Your Expat Taxes!
If you’re planning to spend your golden years overseas, you’re not alone. More Americans than ever are choosing to retire abroad. Many are drawn to warmer climates, better medical care, and lower expenses than the US has to offer.
But before deciding to move or retire abroad, you should always take the time to understand how it will impact your taxes. Here’s what you need to know about the tax implications of retiring abroad.
- The United States is one of the few countries that taxes its citizens on their worldwide income. This means that Americans who retire overseas still have tax obligations.
- If you’re retiring abroad, there’s a good chance you’ll be subject to taxation by the United States and your new home country. Double taxation can be avoided by taking advantage of tax treaties, Foreign Earned Income Exclusion and Foreign Tax Credits.
What Taxes Will I Have to Pay If I Retire Abroad?
Americans who retire overseas still have tax obligations. Typically, you will have to file a tax return with both the US government and your new host country. You may even have to file a tax return with the US state you used to live in.
To get a better understanding of the tax implications when retiring abroad, let’s look at each possibility.
1. US Federal Taxes
First, almost all Americans are required to file a US federal tax return regardless of where they live. Whether you’re in Pittsburg or Paris, the IRS still wants a thorough income report. That means your worldwide income—not just from a US source.
However, most expats don’t end up owing any US taxes when they file.
2. US State Taxes
Many US states continue to tax residents who move away until they sever ties with that state. Depending on the state, this can be an easy process, or it can be difficult. Some states make it hard to remove yourself from their tax jurisdiction.
For example, even if you live in another country, a state may impose taxes if:
- They issued your current driver’s license or ID card
- You have a spouse or child living there
- Your vehicle is registered there
- You’re registered to vote there
- You have a bank account open there
- You own property there
- You maintain a mailing address there (even if you’re using a friend or relative’s address)
States that are notorious for taxing former residents include:
- New Mexico
- South Carolina
3. Foreign Taxes
As a resident of a foreign country, you will probably have to file taxes with that country as well as the US. But, there are some tax-free countries, such as:
- The Bahamas
- The Cayman Islands
- The United Arab Emirates
Are Expats Taxed on Retirement Income?
As we’ve discussed, almost all Americans must file a US federal tax return regardless of where they live. This is virtually always the case for US citizens who receive any traditional kind of income. But what about retirement income? Do you have to report that as well?
Here’s a brief look at some common types of retirement income for expat retirees.
Contributions made to a 401(k) are tax-deferred, meaning that you will owe taxes on any withdrawals you make. You will have to report and pay this tax to the IRS, no matter where you live.
Traditional IRA contributions are tax-deductible, and withdrawals are taxed as income.
Roth IRA contributions were made from income that had already been taxed. This means that qualified withdrawals are tax-free. (Though they are not tax-deductible.)
In most cases, Social Security payments will be taxed abroad just as they would if you were living in the US. However, if you live in certain countries, your Social Security payments may not be taxed by the US. This includes:
- The UK
The rules for these countries vary. Consult a qualified tax professional to learn more.
Under US Treasury Department sanctions, Americans living in Cuba or North Korea are barred from receiving Social Security payments.
Americans living in certain other countries are also typically barred from receiving Social Security.
Those countries are:
Dividends will be taxed by the IRS, just like any other income.
The amount of tax you owe on dividends will depend on your income and filing status. If you are in the 22% tax bracket, for example, you would owe 22% on any dividends you receive.
The tax rules for annuities can vary, but generally, at least some income from an annuity will be taxable.
Stock, Mutual Funds, and Bonds
If you’ve owned a stock, fund, or bond for more than a year, gains from a sale of that asset will be taxed at the current long-term capital gains rates. The gain will be taxed as ordinary income if you’ve owned the asset for less than a year.
Will I Have to Pay Taxes Twice if I Retire Abroad?
As we’ve seen, all Americans who retire abroad must file a US tax return, and most will also have to file a foreign tax return. This leaves you at risk of paying double taxes.
For example, let’s say you retire in Portugal. As a resident of Portugal, you will have to file a tax return with the Portuguese government—and likely pay taxes on your worldwide income. Because the US also taxes the worldwide income of its citizens, you could end up being taxed on the same income by both governments, reducing how much you can keep for yourself.
Fortunately, several policies are in place to help Americans living abroad avoid double taxation like this. The first solution is moving to a tax-free country. By establishing residence in a country with no income tax, you can free yourself from any foreign tax obligations. On the other hand, becoming a resident of a tax-free country is rarely easy. The good news is that even if you live in a country with an income tax, the IRS has several policies in place to help you avoid double taxation when retiring abroad.
How to Avoid Double Taxation When Retiring Abroad
1. Tax Treaties
The US has entered into tax treaties with a number of foreign countries. These treaties define which country a given expat will owe taxes to, helping shield US citizens from double taxation. Generally, you will pay taxes to whichever country you live in for most of the year.
In the example given above, a US citizen living in Portugal would usually be exempt from paying US taxes because of the US-Portugal tax treaty. (Though they would still be required to file a US annual tax return.)
2. Foreign Earned Income Exclusion
Even if you retire in a country without a US tax treaty, there are still methods for avoiding double taxation. The most common is the Foreign Earned Income Exclusion (FEIE). If you qualify for the FEIE, you can exclude a certain amount of foreign-source income from US taxation. This exclusion only applies to income earned if you continue to work. The FEIE only allows wages, salaries, and self-employment income to be excluded. It cannot be used for pensions, social security, or investment income. It’s therefore ideal for those that can work their last few years abroad or for those that continue to casually work during retirement.
The exact amount changes from year to year. For returns filed in 2023 (for the 2022 tax year), This will increase to $120,000 for returns filed in 2024.
Of course, in the case of US-source employment or self-employment income, you will not be able to exclude it from your US taxes as foreign income. In that case, you could be subject to double taxation if the country you reside in taxes your US-source income.
3. Foreign Tax Credit
Another common tax break for expat retirees is the Foreign Tax Credit. This gives you a dollar-for-dollar credit for at least part of your taxes to a foreign government. In many cases, you can claim the full amount you paid in foreign taxes. If a foreign government taxes your US-source retirement income, you may be able to exempt it from US-taxable income using the Foreign Tax Credit.
Always keep detailed records of your income, expenses, and taxes paid in both the US and your new country of residence. This will make filing your taxes much easier and help you take advantage of deductions and credits that could reduce your tax burden.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
Renouncing Your US Citizenship and Retiring Abroad
The only way to end your US tax obligations is to renounce your citizenship. Once you are no longer a US citizen, you will not be subject to US tax policy. However, renouncing your citizenship is a life-changing decision that should never be made lightly. Once you’ve finalized your renunciation, you cannot change your mind and reclaim your citizenship.
To renounce your US citizenship, you will have to follow these steps:
- Obtain a non-US passport
- Fill out several forms
- Attend a renunciation appointment
- File a final tax return
- Pay a renunciation fee of $2,350
- Depending on your tax history and income, you may also be required to pay an exit tax.
Once this is done, you will cease to be a US citizen and will be treated as a non-resident alien for tax purposes.
US Property and Investments After Renunciation
You can retain your assets and investments in the US, including physical property, after renouncing your citizenship. Any investments that you retain in a US account will be treated as follows:
- The cost basis of any stocks, mutual funds, bonds, or other capital assets will now be the value as of the day before your renunciation.
- You will need to notify all banks and brokerage houses of your new status by filing Form W-8CE.
- You will still receive a year-end statement listing your interest, dividends, and capital gains.
- You will be required to file Form 1040NR for any income received from US sources.
- You will generally be taxed at a flat rate of 30% for all US-based investment income. One general exception includes capital gains not being taxable.
- Part of the renunciation process is that you agree you will no longer be eligible to receive any benefits from tax treaties.
- Business-related income from US activities is taxed using the tax tables provided by the IRS. It uses similar tax rates and brackets as Form 1040.
Social Security Benefits for Former Citizens
As long as you have paid into Social Security for 40 quarters as required, you will likely be eligible to collect benefits even after renouncing your citizenship. (There are exceptions to this, so be sure to consult with an expat tax professional to learn the details in your case.)
What Other US Tax Obligations Do Expat Retirees Have?
Along with filing an annual federal income tax return, Americans who retire in another country often have to file additional tax documents. The two most common examples are the FATCA report and the FBAR.
If you own non-US financial assets valued above a certain threshold, you must file IRS Form 8938: Statement of Specified Foreign Financial Assets, better known as a FATCA report. The specific financial threshold will depend on your filing status and whether you qualify as a bona fide resident of another country. To learn more, consult an expat tax professional.
If you have at least $10,000 in one or more non-US (foreign) bank accounts, you must report it by filing FinCEN Form 114: Report of Foreign Bank and Financial Accounts, also known as the FBAR. This form must be filed electronically using the FinCEN BSA E-Filing System.
US Tax FAQs for Retirees Abroad
Can I Contribute to a US Retirement Account While Living Abroad?
Possibly. Most expats can maintain a US retirement account while living abroad. However, making contributions will depend on a variety of factors, including:
- The type of retirement account you maintain
- Your new country of residence
- The source of your income (i.e., from a US source or a foreign source)
For example, you generally cannot contribute to a 401(k) account if you do not receive US-source income. You may be able to make contributions to an IRA account, but this is not a guarantee either. An expat tax expert will be able to explain your options based on your unique situation.
Can I Move My Retirement Account Overseas?
Some expats plan to move their retirement accounts overseas when they retire abroad. This is often a difficult and complicated process. A common problem for many expats is not being able to find a suitable account to open in a foreign country. In most cases, there is no non-US equivalent to a 401(k) or an IRA. In addition to this, transferring your funds to a foreign retirement account would expose you to US tax liability. You may also have to pay an early-withdrawal penalty as well as pay tax on the amounts withdrawn.
What Happens to My Retirement Account If I Renounce My Citizenship?
Expats who renounce their US citizenship can retain their retirement accounts and receive distributions. This applies to both 401(k) and IRA accounts. However, the tax implications will vary based on several factors, such as whether you are subject to the US exit tax. Depending on your tax status and country of residence, your distributions may be taxed at a flat rate of 30%—even if they would normally be tax-free. As mentioned above, you should always take great care when making the decision to renounce your citizenship.
Can I Receive Social Security While Living Abroad?
Yes, you can generally receive Social Security benefits while living abroad—as long as you are otherwise eligible. There are rare exceptions, though. If you live in certain countries, you will be barred from receiving US Social Security payments. Those countries are:
- North Korea
After leaving any of these countries, you will be able to claim any Social Security payments that were withheld during your stay.
Will I Pay Taxes on My Pension Income When Living Overseas?
Yes. Even if you are enrolled in a foreign pension plan, the IRS will typically treat your pension as income and tax it accordingly. With that said, the US has a number of tax treaties and credits in place to protect expat retirees from double taxation.
What Happens If I Don’t File My Taxes Correctly When Retiring Abroad?
Failing to file your expat taxes as required can result in severe penalties. Fortunately, the IRS provides an amnesty program to help expats come into compliance without facing the usual fines. It’s called the Streamlined Filing Compliance Procedures. To use this program, you simply have to follow these steps:
- Self-certify that your failure to file was an accident, not a willful refusal
- File the last three delinquent income tax returns and pay any delinquent taxes you owed during that time (with interest)
- File Foreign Bank Account Reports (FBARs) for the last six years
This will bring you into compliance with IRS regulations.
Are You Planning to Retire Abroad? We Can Help with Your Expat Taxes!
We hope this guide has helped you better understand the tax implications of retiring abroad. At Greenback Expat Tax Services, we help Americans living abroad file their expat taxes accurately and on time.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.