Social Security Taxes and Americans Living Overseas

By ZM Ishmurzina

Millions of US citizens retire abroad and this number has grown over 500% in the past 40 years. Retirees can receive social security benefits abroad. For some retirees residing abroad this is the only source of income. Consequently, American expats wonder about social security taxes.

This is an email from one of our clients. “I am an American expat living overseas in Mexico. I retired in 2012 and started to receive social security benefits. However, I receive pension and some interest income. I would like to learn more about social security taxes. Are my social security benefits taxable?”

Let’s review some key issues that American retirees living overseas must consider.

Social Security Taxes for American Expats

How are Social Security benefits reported?

American retirees living overseas receive a statement “1099-SSA” from the Social Security Administration in January or February. To determine the amount of social security, please use the number reported in Box 5 of this form.

Are Social Security benefits taxable?

Social Security benefits are generally not taxed if this is the only income. However, many American retirees living overseas usually have other sources of income in addition to social security. This is the reason that it is important to understand social security taxes because some SS benefits might be partially taxable.

One important thing to remember is the tax treaty treatment of social security. The country of residence and a tax treaty affect the taxation of SS benefits.

Which amount of social security benefits is taxable?

To determine the amount of social security taxes, American retirees living overseas must add all income and half of benefits. The relevant income is compared against certain base amounts based upon the filing status and total income. There are 2 possibilities:

1. 50% of benefits taxed. This scenario happens if the relevant income exceeds the following amounts:

  • $25,000 if single, head of household, qualifying widow(er), married filing separately and lived apart from spouse all of the tax year
  • $32,000 if married, filing jointly

2. 85% of benefits taxed. This scenario happens if the relevant income exceeds the following amounts::

  • $34,000 if single, head of household, qualifying widow(er), married filing separately and lived apart from spouse for entire year
  • $44,000 if married, filing jointly
  • $0.00 if married, filing separate and lived with spouse at any time

What is Windfall Elimination Provision for American expats?

Foreign pension and Social Security. American living abroad who are eligible to receive a foreign pension or other type of pension from federal, state or local government agency as well as non-profit organization, might be subject to Windfall Elimination Provision (WEP). It means that SSA will determine the amount of social security benefits based upon other earnings. There are several exceptions to this provision.

  1. Non-residents. Social security payments made to non-resident aliens (NRA) living abroad might be subject to 30% tax withholding.
  2. Residence requirements and NRAs. Non-resident aliens residing in countries without a bilateral social security agreement might be disqualified from receiving social security payments if they reside outside of the USA for more than 6 months.
  3. Self-employed American expatriates. Americans living abroad are required to pay self-employment taxes under SECA unless they reside in a country that has a totalization agreement with the U.S.A. It is required even if American expatriates receive social security benefits.
  4. Foreign social security accounts. These accounts are not reported on the FinCEN Form 114.

American retirees living overseas should consult an expatriate tax CPA to learn more about social security taxes. It is essential to work with the firm that provides expat tax services. International tax experts at Artio Partners have helped American expats living in different parts of the world.