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Expat Tax Essentials
As an American living and working abroad, it’s important to know whether the US has a totalization agreement with your host country. But first, you need to know why it matters. In this article, we’re going to look at totalization agreements and how they might affect your expat taxes.
Totalization agreements, also known as social security agreements, are international treaties that establish rules for which countries should receive an expat’s social security contributions. This helps prevent US expats from having to pay into multiple social security systems out of the same income stream – a form of double taxation.
For example, let’s say an expat named Matt moves to Australia to take a job. He must contribute to the US Social Security system as a US citizen. As an employee of an Australian company, he is also required to contribute to the Australian social security system. This means that Matt might have to pay a social security tax twice from his employment income.
Fortunately, depending on the details of his employment, the US-Australia totalization agreement would clarify which system he should contribute to—rather than requiring that he contribute to both.
But the risk of double taxation remains for Americans living and working abroad in countries without totalization agreements.
Totalization agreements are often confused with tax treaties. While the two do have similar purposes, they also have notable differences. So what is a tax treaty, and what makes it different from a totalization agreement?
Like totalization agreements, tax treaties are designed to prevent double taxation. However, tax treaties deal with income taxes rather than social security. If a country enters into a tax treaty with the US, the treaty will determine which country can tax a given source of income.
But because most tax treaties don’t establish any rules for social security contributions, even expats living in a country with a tax treaty could still face double taxation through a social security tax if there is no totalization agreement.
If the country you reside in has a totalization agreement with the US, it could have a major impact on your tax obligations. Let’s look at how totalization agreements affect employed and self-employed Americans living abroad.
The details of US totalization agreements vary from country to country. However, most totalization agreements have the following rules:
It isn’t always one or the other, though. Expats can contribute to—and earn credits from—both social security systems at different times (or for separate income streams). These credits will then count toward your social security coverage in both countries.
For example, let’s say that Cindy moves to Italy, which has a totalization agreement with the US. Because her work plans change over the years, she ends up paying into both the US and Italian social security systems at various times.
When Cindy is ready to retire in Italy, she discovers she doesn’t have enough Italian credits to qualify for social security benefits in Italy. However, she can use her US credits to supplement her Italian credits, allowing her to qualify.
Her US credits are not reduced through this process, either. In the above example, Cindy’s US social security credits would remain the same even after she “transferred” them to Italy. As a result, she may be entitled to social security benefits from the US and Italian governments.
As with expat employees, self-employed expats must pay a social security tax on their income. Because this tax is typically higher than it is for employees, totalization agreements are even more important for anyone who is self-employed.
Unfortunately, the rules for self-employed expats vary even more widely than for employees. This can make it difficult to know precisely how you should pay your social security tax—and to whom.
In most cases, the answer will depend on one or more of the following factors:
Regardless, self-employed expats can also earn social security credits in both countries. These credits can then be applied to both systems.
Currently, the United States has active totalization agreements with 30 countries.
If the country you call home is on this list, you may be able to reduce your tax liability using the rules laid out by the relevant totalization agreement. However, totalization agreements can get tricky. We always recommend getting advice from an expat tax professional when navigating the complex topic of social security taxation.
In fact, if you’d like, we can give you all the help you need.
At Greenback Expat Tax Services, we’ve dedicated ourselves to helping expats worldwide meet their US tax obligations. This includes:
Just contact us, and we’ll get to work helping you in any way we can.