Retiring in a different country involves a myriad of decisions and planning. If you are interested in retiring abroad, then understanding the tax implications of moving out of the U.S. is vital in being prepared to make the transition to living overseas. For seniors retiring abroad, the rules and regulations for paying taxes differ based on citizenship status, country of residence, sources of income and more.
Researching the tax rules that apply to your unique situation is the best way to ensure you are following all required laws and avoid issues with the U.S. or the government in your new country of residence. Understanding the tax laws for retiring abroad that could affect your future income and/or savings can help you make financial decisions related to retiring outside of the U.S. Consider the following information about tax situations that may arise while living in a foreign country as a retiree.
U.S. Taxes on Worldwide Income
If you are living in a foreign country as a retiree but are still a U.S. citizen, then you are still required to pay taxes and file tax returns every year. Depending on your state of residence in the U.S. before moving overseas, you may be required to file a yearly state return and/or pay state taxes on your income. You must follow U.S. tax laws while living abroad even if your permanent residence is now abroad and/or your income is not subject to tax costs. Only under special circumstances will a retiree living abroad not have to file yearly a tax return with the IRS.
On a yearly return, you must provide information about your worldwide income, including money held in trusts and/or banks in your new country of residence or any other foreign country. IRS tax returns require all forms of income and deductible expenses, regardless of the type of currency, to be included within a return. Withholding or providing false information on a tax return is subject to fines and/or criminal prosecution, so ensuring accurate and complete personal and financial information is filled out on a yearly return is imperative for expatriates.
For senior retirees living abroad who end up owing taxes to the IRS, the tax payment must be made in U.S. dollars.
Taxes on Social Security Income
For many seniors, Social Security is an important form of income during retirement. If Social Security is your only form of income while retiring abroad, then you may not have to file a federal tax return with the IRS or pay any taxes on the benefits. However, if you are receiving other forms of income besides Social Security during retirement such as a part-time job or self-employment, then the U.S. may impose taxes on the income and you will be required to submit a federal tax return.
Tax Rules in Foreign Countries
Depending on the tax rules in a country, you may be required to file taxes separately in your new country of residence. However, most countries do not impose taxes on retirement income. If the new country of residence and the U.S. are imposing taxes on the same income, then you can apply for a deduction. Keep in mind that every country has different tax rules, and you should understand these regulations before moving abroad to avoid financial complications in the future. Be sure to keep a close eye on due dates for returns in the countries where you are filing taxes.
Retirees living overseas who become self-employed or take on a full- or part-time job may be eligible for the Foreign Earned Income Exclusion (FEIE). The FEIE allows Americans working in another country to not be taxed on their foreign-earned income.
If you are living in a foreign country as a retired senior, then you are usually required to meet the minimum essential coverage (MEC) level for health insurance implemented by the Affordable Care Act. However, if you are a resident of a foreign country or are living abroad for 330 days out of a year, then the U.S. considers you to be exempted from the MEC health insurance requirement.
The U.S. also has tax treaties with some foreign countries. If you are living in a country that has a tax treaty with the U.S., then you may be exempt from U.S. income taxes or eligible for a reduced taxation rate, deductions or credits. Some states honor tax treaties, while others do not. Seniors should consult a tax specialist and/or do research to find out what foreign tax rules apply to their unique situation.
Taxes Involved With U.S. Citizenship Relinquishment
For retirees who decide to relinquish citizenship or permanent resident status in the U.S., a dual-status alien form and expatriation statement must be submitted in place of a yearly tax return. An expatriation statement must also be submitted to the IRS.
Seniors who have relinquished citizenship or permanent resident status are still eligible to receive Social Security benefits and other forms of retirement income. However, Social Security may be taxed differently for expatriates. The Social Security Administration (SSA) withholds a percentage of the nonresident alien tax unless you live in a country that qualifies for a tax treaty benefit. The percentage withheld from Social Security benefits in these situations is usually a significant amount.
Because expatriates are considered non-U.S. citizens, they are usually subject to paying higher taxes on certain items than regular U.S. citizens. Expatriates pay much higher estate taxes on assets than U.S. citizens. Furthermore, non-U.S. citizens are also required to pay gift taxes and exit taxes, when applicable. Gift taxes limit the exchange of assets between spouses. Exit taxes may be applied to the assets of expatriates with net future gain.
Ultimately retired seniors should research the pros and cons of relinquishing citizenship or permanent resident status from the U.S. If you are going to pay more in taxes as an expatriate than as a citizen residing in a foreign country, then remaining a U.S. citizen may be the best idea. Conversely, if relinquishing U.S. citizenship is more beneficial to your personal and/or financial situation, then becoming an expatriate may be the right option for you.