Americans who move abroad are required to keep filing US taxes, reporting their worldwide income. They may also have to continue paying US social security contributions, including self-employed expats who earn as little as $400 a year. Expats who meet tax residency criteria in a foreign country may also have to pay foreign taxes and social security contributions in the country where they live.
While the tax treaties that the US has with around 100 other countries generally don’t prevent US expats from having to file US taxes, there are several IRS exemptions that expats can claim when they file their federal US tax return that allow them to avoid paying taxes on the same income twice.
The main exemptions are the Foreign Tax Credit, and the Foreign Earned Income Exclusion. Which is most beneficial to claim depends on several factors, such as where the expat lives, the tax rate in that country, their income levels, and the circumstances of their spouse for example, but in all cases expats have to file a federal return to claim them.
Furthermore, while these measure reduce US income tax liability, they don’t reduce social security taxes.
So what about social security contributions?
US social security for expats
To claim social security benefits in retirement, all Americans, including those who live or who have lived abroad, must pay at least 40 quarters’ of social security contributions.
In general, expats who work for an American employer abroad, as well as those who are self-employed, are required to continue paying US social security contributions, while those who work for a foreign firm don’t have to.
Expats who work for an American firm or who are self-employed may well also be required to pay social security contributions in the country where they live too, depending on the local tax laws. Totalization Agreements help prevent expats from paying social security payments twice.
“The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.” – the IRS
Totalization Agreements for US expats
Totalization Agreements are tax treaties that are specifically designed to prevent the possibility of paying social security contributions to two countries at the same time.
Most Totalization Agreements stipulate that if a person is going to live in a foreign country for up to five years, they will continue paying social security contributions in their home country. If on the other hand they intend to live abroad for longer, or if they don’t know how long they are going to live abroad for, they will instead pay social security contributions in their host country.
The great thing about Totalization Agreements is that they allow for contributions made in either country to be applied to either system. So for example if an American lived in the UK for 7 years and so paid UK social security contributions during this time, those contributions would count towards their ability to receive US social security benefits when they retired.
However, while the US has income tax treaties with around 100 other countries, it only has Totalization Agreements with 30, being:
Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, Uruguay.
Expats who live in one of these countries should always consult an expat tax specialist to find out how they can benefit from the relevant Totalization Agreement.
Expats who live in other countries on the other hand should also consult an expat tax specialist to see what their best options are.
Expats who are behind with their US tax filing could face significant hassle and penalties if the IRS contacts them before they become compliant.
As such, we recommend that expats who are one or two years behind with their US tax filing back file their missing returns at their earliest convenience. Expats who are three or more years behind on the other hand can catch up without facing penalties by using the IRS Streamlined Procedure amnesty program, as long as the IRS hasn’t contacted them yet.