By Ines Zemelman, EA. , Founder of taxesforexpats.com
Thanks to easy transportation and new technologies, the world continues to get smaller. This means many Americans are picking foreign locations for retirement rather than simply moving to the historically typical Florida or Arizona. Lower costs, nice weather, and even acceptable medical care make more exotic places appealing.
As one might expect, though, simply moving abroad after retirement does not exempt United States citizens from tax reporting obligations. Be sure to include tax considerations in your decision making process alongside learning the local language!
United States citizens are required to report all of their income – including pensions, other retirement plans, real estate, and other foreign or domestic investments – regardless of where it was earned or where they are living.
Using This Guide
This guide is intended for those who are already retired, or who are planning their retirement. It is important to include these considerations in decision making so that retirement distributions can be optimally timed and retirement location chosen in a way to minimize taxes.
Retirement Income Taxation
United States retirement income, except distributions from a Roth IRA, is required to be included in gross income for US tax purposes. Note that retirement income is classified as passive income, so the Foreign Earned Income Exclusion does not apply.
Depending on the foreign country you are living in and the visa type, your retirement income might also be taxed by the country you are living in. The good news is that in most cases you will not be double taxed – the Foreign Tax Credit will offset this additional tax.
Social Security Considerations
With only a few exceptions, Social Security benefits are taxed the same when residing in foreign countries as they are in the United States. Social Security payments are not subject to US tax if you are living in the United Kingdom, Romania, Canada, Egypt, Germany, Ireland, Italy (if you are an Italian citizen), Israel, or Romania.
Note that Social Security benefits are taxed for individual filers with combined income over USD 25,000, and combined income over USD 32,000 for those filing jointly. Married couples filing separate returns usually will be subject to tax as well.
It is also important to realize that the United States has placed sanctions on several countries that forbid sending of Social Security benefits to these countries. After moving to a sanction-free country Social Security benefits can be collected, including those denied during your time in a sanctioned country. The sanctioned countries are Cuba, North Korea, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam.
State Tax Requirements
Each state has different requirements, so be sure to research the specific requirements for your current state of residence. Some states, such as Florida, Texas, and Nevada do not impose state taxes. Some states, such as Virginia, Maryland, and Colorado require those retiring abroad to file state tax returns even if they have no tax obligation.
Social Security benefits and retirement income are not subject to state tax while living abroad. Most rental property income, however, is taxed by those states that impose income tax.
Retirement Account Distributions
Although retirement account distribution requirements are really not any different when residing abroad, they are a key part of retirement financial planning, with some serious penalties if a mistake is made.
During the year that you reach age 70 ½, you must take an RMD, or Required Minimum Distribution from your 401(k) or IRA. You can always withdraw more, but you must take the minimum, which is based on the account value and your age. If you do not withdraw at least the RMD, you will be penalized 50% of the difference between the RMD and what you withdrew.
It is vitally important that you understand your reporting obligations while living abroad. If your total aggregate accounts outside the United States exceed USD 10,000, you must file form FinCEN 114 . This form is only informational – that is, there is not a tax obligation associated with it – but the form is mandatory for compliance purposes. For higher account thresholds, Form 8938 is required. Again, this is only informational to help the US Treasury track the global flow of money.
These are the thresholds that trigger Form 8938 for US residents living abroad:
One reason many people choose to retire abroad is that they are married to a non-US citizen. Because of this, survivor benefits are a concern. Although there are exceptions, in general a surviving non-US citizen spouse will stop receiving Social Security benefits if they are outside the United States for 6 consecutive months.
A surviving spouse may receive Social Security survivor benefits if they are of retirement age, the United States worker was receiving benefits, they did not remarry, and they meet one of the following requirements:
- Citizen of Austria, Belgium, Canada, Chile, Czech Republic, Finland, France, Germany, Greece, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom
- Resident of Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea (South), Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom
- Foreign spouse and US spouse were living together in the United States for a minimum of five years during marriage. The five year minimum does not have to be continuous.
If these requirements are not met, the surviving spouse can move to the United States after they are widowed and complete the residency requirement to then qualify to receive Social Security payments.
Concern for health care coverage goes hand-in-hand with retirement, especially when retiring abroad. Unfortunately, Medicare benefits are virtually non-existent for citizens living abroad. Although you are exempt from the Obamacare requirements while living abroad, you will most likely want to find some health care option available in your new country of residence.