Retiring Abroad? Here Are 3 Tax Implications for You To Know
Written by
Yaël Bizouati-Kennedy
Edited by
Chris Cluff
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Retiring overseas is a dream for many Americans, whether they are in search of new adventures, more exotic pastures or cheaper costs of living.
And many of them are making the jump: USA Today reported that in 2022, there were 443,546 retired Americans receiving Social Security benefits while living abroad, according to the Social Security Administration — nearly double the amount from 1999 when 219,504 retired workers received Social Security benefits while living in a foreign country.
But spending retirement abroad can also come with some bureaucratic and administrative headaches, such as numerous tax implications, which can affect seniors’ financial well-being. This is why experts recommend familiarizing yourself with these in advance of your big move so you can avoid any surprises.
According to Mark Luscombe, JD, LL.M, CPA and principal analyst with Wolters Kluwer Tax & Accounting, “Tax issues associated with retiring abroad can be very complicated,” as it will vary based on the particular country chosen.
For instance, he advised you check whether there is a tax treaty between the U.S. and the country chosen and what it provides, as well as understand what the tax laws of the particular country chosen are.
“Retirees should consult with a tax expert knowledgeable about these issues for a particular country,” added Luscombe.
Keep reading to discover the kinds of implications that affect retirees specifically.
Filing US Taxes
Retiring abroad can offer exciting opportunities, but it’s essential for retirees to understand the tax implications they may face as U.S. citizens living in another country.
Something many retirees are surprised to learn is that even though they live abroad, they are still required to file U.S. taxes annually, said Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth Management.
“The United States taxes its citizens on their worldwide income, regardless of where they reside,” he continued. “This means that retirees must report income from foreign sources, including pensions, rental income and investment gains, to the IRS [Internal Revenue Service].”
To avoid double taxation, Ambrose explained that the U.S. offers a Foreign Tax Credit, which allows retirees to offset their U.S. tax liability with taxes paid to the foreign country where they reside.
“However, navigating the complexities of claiming this credit requires careful consideration and often the assistance of a tax professional,” added Ambrose.
Retirement Income
Another vital aspect to consider is retirement income, including 401(k)s, IRAs and Social Security benefits, which often remain subject to taxation, according to experts. As Ambrose explained, U.S. citizens receiving Social Security benefits while living abroad are still subject to U.S. taxation on those benefits.
Again, to mitigate the risk of double taxation, expatriates can rely on international tax treaties and the Foreign Tax Credit, added Michael Wallace, CEO of Greenback Expat Tax Services.
“These tools are essential for those looking to retire overseas, ensuring compliance with both U.S. IRS reporting requirements and the tax obligations in your new country of residence, thereby avoiding penalties,” Wallace said. “Understanding the nuances of how retirement income is taxed and leveraging available credits are critical steps in managing your tax obligations effectively.”
He also noted that it’s imperative to stay informed about the specific tax rules of your new home country and to seek specialized advice to navigate the complexities of international taxation seamlessly.
Wallace said, “This informed approach is key to ensuring a financially stable retirement abroad without unexpected tax burdens.”
Bank Accounts
Bank accounts are another point to keep in mind, said Taylor Kovar, CFP, founder and CEO at 11 Financial.
“If you have a total of $10,000 or more in foreign financial accounts at any point during the year, you have to file an FBAR (Report of Foreign Bank and Financial Accounts),” Kovar explained. “Not doing so can lead to some serious penalties.”
As the IRS explains on its website, a U.S. person — including a citizen, resident, corporation, partnership, limited liability company, trust and estate — must file an FBAR to report “a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.”
The IRS adds that generally, an account at a financial institution located outside the United States is considered a foreign financial account. Additionally, according to the website, “Whether the account produced taxable income has no effect on whether the account is a foreign financial account for FBAR purposes.”
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