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U.S tax guide for retirees

U.S tax guide for retirees

Who should use this guide?

Anyone who is retired, or planning to retire.

Why use this guide?

Understand how your income will be taxed as a retiree abroad. Learn how to time your retirement distributions to reduce tax hit.

How to use this guide?

Apply the considerations discussed below and take appropriate steps prior to leaving for your mission.

Thailand is the new Scottsdale! More and more Americans are choosing to spend their retirement years abroad. The cost of living is lower, quality of medical care is often high and climate favorable.

Before you sign up for language courses and say goodbye to your neighbors, there are, however, vital tax considerations that you must take into account prior to making your decision.

As a retiree, you do not absolve yourself of U.S tax reporting requirements. The United States requires its citizens to report their worldwide income annually - regardless of their place of residence. While your income may come from a variety of sources - including domestic and foreign investments, real estate, pensions and retirement plans - all of which must be correctly accounted for in your U.S. tax return.

Step 1

Retirement income

Will I have to pay TAX on my U.S. Retirement income?

Retirement distributions, except for ROTH IRA, are included in your gross income in the US. This is considered "passive" income and is not eligible for the Foreign Earned Income Exclusion.

US Retirement income may also be taxable in your new country of residence. It depends on the country where you live and your visa status. There will be no double taxation, though. The US tax will be offset through the Foreign Tax Credit mechanism.

Step 2

Social security

Social security payments - can you receive them? and will you be taxed on them?

If you move to one of the following countries, your Social security benefits will not be taxed by the US -- Canada, Germany, Egypt, Ireland, Israel, Italy (only if you are an Italian citizen), Romania, UK. 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.

Sanctioned countries

Importantly - Minister employee wages are not FICA wages – therefore no Social Security or Medicare taxes are withheld from a minister’s pay, nor paid by the church. Minister employee wages are subject to SECA (Self‐Employment Contributions Act).

You cannot have your social security check sent to one of these countries due to sanctions - Cuba, North Korea, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam. Once you move back to the United States or to a country free of sanctions, you will be able to collect your Social Security payments – including any payments you were denied while living in a country with sanctions.

Step 3

State tax

Will have to pay state taxes?

As a retiree abroad, the most likely reason for potential state tax filing requirements is from U.S. rental properties. If you have rental properties, you will likely have a state tax obligation (some states do not have state tax filing obligations - Texas, Nevada, Florida).

Retirement income and Social Security are exempt from state tax if you live abroad. If you do not have rental properties in your former state then then for most states you will be completely exempt from state filing obligations. Certain states will require that you continue filing after retiring abroad even if you do not have state taxable income. Examples of such states are VA, CO, MD.

Step 4

Pension distributions

How much should I withdraw from my pension?

If you have a US pension, in the year you turn 70 1/2 , you will be required to take Required Minimum Distributions (RMD) from your IRA or 401(k) plan. You may choose to withdraw the minimum, or you may choose to withdraw more. The amount you must withdraw is determined based on your age and account value.

Failure to withdraw the RMD will put you at risk for an excise penalty equal to 50% of the amount you should have withdrawn but did not.

Now - in determining how much to withdraw, you need to take into account your gross income.

The tax rate on pension distributions will depend on the total taxable income of the retiree. If total income is below the taxable level then plan distributions will remain tax free for the recipients.

Please see our article on this topic for a more in depth exercise - How much should retirees withdraw from their pension?

Step 5

Financial reporting

Opening financial accounts abroad - Fatca & FBAR Requirements

If this is your first time abroad, welcome to financial reporting requirements. If your aggregate financial accounts outside of the U.S exceed $10k, you will be required to file FinCEN 114 with the U.S. Treasury. There is no tax due generated from this form - it is purely informational - but it is required from a compliance perspective. Form 8938, part of your tax return, is required if you meet higher thresholds, but fulfills the same premise as FBAR - no tax due, but purely informational to assist the IRS and Treasury in tracking money flows globally.

Form 8938 thresholds (resident abroad)

Filing status	Aggregate value at year end	Highest value at any time during the year
Unmarried/Single	$200,000	$300,000
Married filing joint (MFJ)	$400,000	$600,000
Married filing separately (MFS)	$200,000	$300,000

Step 6

Survivor benefits

Will my NON-US spouse be able to receive survivor benefits?

If you marry a non-US citizen, a common reason why one may retire abroad, it is always a major concern to make sure your loved ones are taken care of. If you (U.S. citizen), were to unfortunately pass away, these are examples of the benefits that survivors may receive:

There is a general rule that for any spouse who is a non-US citizen or Green card holder, social security payments may cease if the spouse is outside of the U.S for 6 or more consecutive months. The devil is in the details, however, as there are exceptions to this rule, and having a firm grasp on these exceptions will allow your surviving non-US spouse to live peacefully, where they please.

The following table assumes that the spouse is of full retirement age and the U.S. worker (you) receives social security benefits.

Spouse is a citizen of (not necessarily a resident 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 - no further requirements.
Not citizen or resident of the countries above - but foreign spouse lived together with you in the U.S for at least five years while married (not necessarily continuously)

Spouse is a resident (not necessarily citizen) 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
Not citizen or resident of the countries above - but foreign spouse lived together with you in the U.S for at least five years while married (not necessarily continuously)

If you were to unfortunately pass away, your foreign widow/widower may receive survivor benefits from social security if the requirements above are met and they did not remarry.

Reduced benefits are available as early as age 60 (if not disabled) - or full benefits at full retirement age or older. If they are not a citizen or resident of the countries listed above, and have not initially met the five-year residency requirement, they can relocate to the U.S. after being widowed to complete thes residency requirement and subsequently qualify for Social Security Benefits.

Step 7

Medicare

Will I receive medicare? Will I be have to nuy U.S. Health insurance?

Health coverage is certainly a matter of concern for those retiring abroad. Medicare coverage abroad is very limited, close to none. You should research health care options in the country where you plan to retire.

You will be exempt from ACA requirements to buy U.S. Healthcare coverage because you reside abroad.

Updated IRS guidelines for inherited retirement accounts

Understanding tax extensions and payment obligations 2024

A comprehensive guide to IRS Form 56 for expats