All Americans are required to file and pay US taxes, declaring their worldwide income, wherever in the world they live. The US is the only major country that requires its citizens to file a tax return even if they are expatriates.
Thankfully, there are several exemptions that US expats can claim that reduce or eliminate their US tax liability, however they do still have to file to claim them.
So where does this leave expatriates with regards to the US social security system? The two main questions that expats most often ask regarding US social security are whether they still have to pay US social security taxes, and whether they can still receive US social security payments, when living abroad.
Receiving social security benefits abroad
Americans who have paid the requisite amounts of US social security tax (a total of 40 quarters of contributions) are entitled to social security payments when they retire and can receive them anywhere in the world, either by cheque or by electronic payment directly into a US or foreign bank account.
Bear in mind that social security benefits can be considered taxable income by the US (depending on how much other income you may have), and may also be taxed in your country of residence (depending on whether that country taxes residents’ worldwide income, or just income sourced in that country).
Up to 85% of us social security benefits for expats are considered taxable income, depending on the individual’s circumstances. However, the residents of 11 lucky countries may be able to avoid paying this tax thanks to provisions contained in the tax treaties they have with the US. These countries are Canada, Egypt, Germany, India, Ireland, Israel, Italy, Japan, Romania, Switzerland, and the UK.
“For many seniors with a sense of adventure and an updated passport, the ideal retirement destination lies outside the U.S. Attracted by a lower cost of living, high-quality health care and an exotic locale, retirees are putting down roots across the border and around the globe.” – Kiplinger
To claim the relevant provisions, expats need to be permanent residents in one of these countries; can’t have emigrated for the purpose of reducing or avoiding taxes; and must file form w-8BEN correctly (in particular section 10, where you should reference the part of the tax treaty that contains the relevant provision).
Paying social security taxes abroad
All American citizens and green card holders living abroad are still required to file and pay US taxes, however the same isn’t always true for social security taxes.
As a rule of thumb, expats who work for an American firm abroad (including the US government), and those who are self-employed, are still liable to pay US social security and medicare taxes. Those who work for a foreign employer meanwhile, other than on a short term contract, are generally not liable to pay US social security taxes.
American expats working for a US employer abroad, or who are self-employed, can therefore find themselves liable to pay social security contributions to the US and to the government in their country of residence, unless they live in a country the US has a Totalization agreement with.
Totalization agreements allow expats to pay social security contributions to either the US or their country of residence, with the contributions made counting towards either system in terms of future benefits entitlement. The US currently has Totalization agreements with just 26 foreign countries:
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, the United Kingdom.
Totalization agreement typically specify that expats abroad on fixed short term contracts or not intending to stay abroad for more than 5 years will continue paying social security taxes to the US and not in the country where they live. If they are planning to live abroad for longer however, they’ll just pay in their country of residence.
If in doubt…
Filing and paying US taxes from abroad is often more complex than filing from the states, as the difference in tax liability can be significant if you don’t apply the best exemptions and exclusions given your individual circumstances. As such, if you have an doubts or queries regarding your situation, we strongly recommend that you contact a US expat tax specialist for some advice.