5 Vital Tax Tips to Consider Before Retiring Abroad
When deciding to retire abroad, the factors most often considered include political stability, weather, quality of life and affordable healthcare. These are certainly important, but you also need to figure out a way to pay for this glorious next stage of your life. You’ve saved for retirement for years - don’t take your eye off the ball now that you’re finally there. Hint - not all countries are equal with regards to taxing American retirees. Let’s look at some key tax factors to consider when planning to retire abroad.
1. Will my U.S. pension be taxed?
A. Distributions from a U.S. employer pension and from Traditional IRA’s will remain fully taxable by the IRS regardless of the country you reside in. The good news – pension distributions will be exempt from U.S. state taxation. If you received those distributions while living in the US, then state tax rate would depend on the tax rules of the state where you live upon retirement, not by the state where you earned it.
I.E., if you earned pension in NY and moved to CA, you would pay state tax on pension in CA, based on your CA tax bracket. If you earned pension in CA and moved to FL your pension would not be taxable because Florida does not levy a state tax. Same exemption from the state taxation will take place if you live abroad. However, pension may be taxable by your new country of residency. Please consult a tax specialist in your new country of residency.
If your U.S. pension is taxed by the IRS and by the country where you live you will be protected from double taxation through the foreign tax credit mechanism.
B. Distributions from ROTH IRA will remain non-taxable by the IRS and by your new country of residency. ROTH IRA was funded with after-tax money and therefore will never be taxed again.
2. Is my Social Security pension taxable?
Rules for taxation of U.S. Social Security benefits are different depending on your country of residence.
Beneficiaries of the U.S. Social Security benefits residing in the following countries are exempt from U.S. tax on their Social Security benefits.
●Canada
●Egypt
●Germany
●Ireland
●Israel
●Italy (You must also be a citizen of Italy for the exemption to apply)
●Romania
●United Kingdom
If you live in any country not on this list, your U.S. Social Security will be taxable based on the same rules that if would be taxable in the U.S.
You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.
On the flip side, if you also earned Social Security benefits in your country of residency outside of the U.S. you may be exempt from the U.S. tax on those benefits by virtue of the Tax Treaty between your country of residence and the U.S.
For example, if you earned Social Security benefits in France, those benefits will be exempt from U.S. tax. Same exemption from U.S. tax applies to the Social Security benefits earned in South Africa. Other countries may have partial exemption of Social Security benefits - all those exemptions can be found in the Tax Treaty between your country of residence and the U.S.
3. Healthcare - do I have to buy a US healthcare plan to avoid the ACA penalty?
If you move abroad and plan to stay there for an extended period, you may qualify for the Bona fide residence status in your new country of residence. As a Bona Fide resident of a foreign country you qualify for exemption from mandatory Healthcare coverage in the U.S.
If you spend part of the year abroad and part of the year in the U.S., you qualify for an exemption only for the months that you lived abroad and only if you meet the Physical Presence test. You do not need to file form 2555 to claim foreign earned income exclusion
in order to qualify for exemption from U.S. health coverage but you should make a statement on your tax return that you meet the requirements of the Physical Presence test for the period claimed for health care exemption.
If you already reached the Medicare age and earned Medicare benefits in the U.S., you do not have to worry about the health care exemption and may stay in the U.S. or abroad for as long as you wish with no risk of ACA penalty.
4. Will I continue receiving my U.S. Social Security payments if I move abroad for an extended period of time?
Before you finalize your retirement destination - find out how being outside the United States may affect your Social Security payments. You should know what information to report to the U.S. Social Security administration and how to report it. That way you can make sure that you will receive all Social Security payments you are entitled to.
Wire transfers can be done only to US banks. Checks can be sent world-wide - but note that the Social Security administration does not send payments to certain countries - Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. An exception can be made if you agree to appear at the U.S. Embassy or consulate every three months.
Lastly, please note that there are special rules for the Green Card holders and for non-resident aliens who worked in the U.S. and earned Social Security benefits. Full details are provided in the Social Security administration document we link below.
For more details about rules related to receiving Social Security payments while living outside of the United States please see the following document https://www.ssa.gov/pubs/EN-05-10137.pdf
5. Will I have to pay local taxes on my US sourced income in the country I reside?
The answer to this question will depend on the country you choose to retire to. Therefore we recommend that you check with a local tax professional to find out whether U.S. sourced pension must be reported / taxed.