American citizens and Green Card holders living abroad are obliged to file their U.S. taxes annually if they meet one of the minimum thresholds imposed by the IRS. 

This citizenship-based taxation system applies regardless of where in the world the U.S. citizen or Green Card holder is located and is a frequent source of headaches and frustration come tax season.

Before we get into the U.S. tax implications during retirement as an American citizen or Green Card holder abroad, let’s review crucial information for expats to understand prior to filing. 

Minimum Filing Threshold for Taxpayers Younger Than 65

Minimum Filing Threshold for Taxpayers 65 And Older

Key IRS provisions

Current expat retirees and those who are planning for retirement abroad should be aware of several IRS provisions. Knowing the following will set you up to file correctly and advantageously:

• Foreign Bank Account Report (FBAR): Anyone with $10,000 or more in foreign-registered financial accounts at any point during the calendar year must file an FBAR. This rule applies even if the $10,000 is distributed between multiple accounts. 
• Foreign Account Tax Compliance Act (FATCA): FATCA is a 2010 law that requires all foreign financial institutions to disclose American account holder information to the U.S. government in an effort to make it easier to identify and discourage tax evasion.
• Streamlined Compliance Procedures (SLP): This IRS procedure allows eligible U.S. taxpayers who have missed previous tax filing obligations to get caught up. This program may be an option for all expats - no matter how behind in filing you are. 
  
  

Getting Ready for Retirement as a U.S. Expat

Now that we’ve laid a baseline foundation of provisions that U.S. expats should be mindful of when preparing for U.S. tax season, let’s take a look at common IRS pension plans expats may need to consider when planning retirement. 

Please note that all references to the tax implications in the chart below refer to the U.S. system; foreign tax implications will vary by country and should be discussed with a foreign tax specialist in your resident country. 

IRA Retirement Account Types

401(k) accounts

A 401(k) is one of the best retirement options for the following reasons:

• 401(k) contribution limits are much higher than those of IRAs: $22,500 compared to $6,500 for IRAs in 2023.
• The possibility of employers matching employees’ contributions is an exciting way to get additional income.

Unfortunately, saving with a 401(k) may not be possible for an expat. This is because, in most cases, to contribute to a 401(k), your employer must be a U.S.-based company offering a 401(k) plan.

Some options for expats to manage U.S. retirement plans

It’s best to begin considering your options and planning as early as possible to ensure that you are receiving the maximum benefit available to you.

• Withdrawing funds from your U.S.-based retirement account and then depositing the money in a retirement account in your country of residence
• Maintaining your U.S.-based retirement account and managing it from your new home.

Of course, it’s not always possible to plan ahead, and we sometimes don’t know what we don’t know. Depending on your circumstances, consulting with an expat tax specialist may be of interest - particularly if you have multiple pension accounts and high-value assets. 

Foreign pensions and U.S. taxes

Foreign pension plans are subject to U.S. reporting requirements, and contributions, growth, and distributions are liable to U.S. taxation. The exact way in which a pension is taxed, however, depends on how it’s classified for U.S. tax purposes, which often varies from its classification and taxation in the country it originates in.

Below are some examples of standard foreign pension plans that many expats pay into. Expats should be mindful that this is simply a tiny sampling of the foreign pension plans in the world, and that the tax implications of contributing to any foreign pension plan are unique to each country’s individual arrangement with the U.S.. 

• The UK’s Employer Sponsored Pension Schemes & Self-Invested Personal Pensions (SIPPs)
• Canada’s Registered Retirement Savings Plan (RRSPs)
• Germany’s Pillar Pension System
• The Netherlands’ Old Age Pension (AOW)
• France’s Public Pension Fund (FRR)
• Switzerland’s Old Age and Survivor’s Insurance (OASI)

The U.S. often treats a foreign pension as a Passive Foreign Investment Company (PFIC)

PFICs include companies where at least 75% of the income is passive (e.g. dividends, royalties, rents), or where 50% or more of their assets produce passive income. Since many pension plans have stakes in foreign mutual funds, hedge funds, and insurance products, they often fall into this category. PFICs are filed on Form 8261.

The income received by retirees when they receive distributions from their foreign pensions is classified as unearned income and sometimes referred to as passive income. 

While reporting requirements relating to foreign pensions are unavoidable, there are still strategies that can be leveraged to minimize your tax liability. For example, expats in countries with a higher income tax than the U.S. can claim the Foreign Tax Credit to not only eliminate their tax bill but also accrue credits that can be applied to foreign pension plan contributions. 

The Foreign Tax Credit (FTC) vs the Foreign Earned Income Exclusion (FEIE)

A common question expat retirees have is whether they should use the FTC or the FEIE to offset their U.S. tax liability on foreign pension distributions. The answer to this is, fortunately, straightforward: the FTC should be applied in this scenario. 

The reason for this is that the FEIE can only be applied to earned income (as its name implies). Earned income refers to all of the income and wages you receive as an employee, business owner, or independent contractor.

The FTC, on the other hand, can be applied to unearned income, which we mentioned earlier. Unearned income includes almost all types of income that you don’t actively work for and is sometimes called “passive income.”

It’s important to note that there are many factors to consider when strategizing how best to apply the FEIE and the FTC. This is because there are many other provisions that may come into play depending on your unique circumstances. 

Tax treaties and pensions

Tax treaties allow foreign country residents to receive a reduced tax rate or an exemption from U.S. income tax on certain income they receive. The U.S. has tax treaties in place with a number of different countries which are designed to prevent double taxation. Unfortunately, a tricky clause called the Savings Clause means that the IRS often acts as if no treaty were in place at all. 

Note: The UK is a notable exception in this case because a section in the U.S.-UK tax agreement allows for certain pensions to be treated similarly to a U.S. 401(k).

Tax treaties and Totalization Agreements

A tax treaty is the overarching agreement between two countries that governs how taxpayers fulfill their tax filing requirements. 

Totalization Agreements, on the other hand, are specific international tax treaties that seek to eliminate dual taxation with regard to Social Security and Medicare taxes in the United States. 

When it comes to reducing U.S. taxes on a non-U.S. pension, a Totalization Agreement may eliminate double taxation on Social Security contributions to two different insurance systems. It does so by defining which country the tax is paid to and how to deal with credits earned.

Frequently Asked Questions about Retiring as a U.S. expat

Will my country of residence tax U.S. pension distributions?

This depends on the type of arrangement between the U.S. and your country of residence. A key piece of information to understand is whether or not your country has a Totalization Agreement with the U.S. Totalization agreements are intended to make you “whole,” meaning that social security taxes are only required to be contributed in one country. A Totalization Agreement allows you to “combine” credits so there are enough to qualify for both countries.

My country has a Totalization Agreement with the U.S. How do I apply it? 

There are only a handful of countries with Totalization Agreements in place with the U.S. Each country has pamphlets outlining requirements, benefits, and who to contact.

What is the Windfall Elimination Provision (WEP)?

The Windfall Elimination Provision (WEP) is a formula that can reduce the size of your Social Security retirement benefit if you receive a pension from a job in which you did not pay Social Security taxes. In practice when navigating expat taxes, the result is generally reduced benefits from each country in an effort to prevent taxpayers from “double-dipping.”

What is Government Pension Offset?

The Government Pension Offset affects spousal Social Security benefits by reducing them in situations where the spouse did not pay Social Security taxes on their employment earnings.

Selling property and navigating taxes - a brief overview

Real estate can often make for an excellent long-term investment but does require careful planning when navigating taxes as a retiree. A common strategy to avoid U.S. taxes on the sale of the property is to gift it to a family member. In many cases, the most strategic family member to whom to gift the property is a non-resident alien (NRA). 

When gifting a property that exceeds $164,000 in value (the base threshold for gift disclosure to a foreign spouse for 2022), a gift tax return must be filed with the IRS using Form 709. However, no U.S. taxes will be owed on the gift unless the total value of combined gifted properties exceeds $12.06 million for 2022.

Form 709 is a bit complicated to file, and the thresholds triggering reporting differ if you are gifting to someone who is not an NRA. If you are able to, the best strategy is to invest in a robust financial support team who can support you in estate and inheritance planning. 

Being Retired as a U.S. Expat - Reducing Your U.S. Tax Bill

Although we discussed earlier that you cannot claim the Foreign Earned Income Exclusion (FEIE) to offset the U.S. tax liability on your foreign pension distributions, the FEIE does have its role to play in reducing U.S. tax liability. 

How to correctly apply the Foreign Earned Income Exclusion (FEIE) - Form 2555

The FEIE is a tax benefit allowing expats to exclude the first $112,000 of their earned income. There are two means of claiming:

Physical Presence Test: 

• 330 days abroad during any 365-day period

Bona Fide Residence Test: 

• Reside abroad for at least one full calendar year
• Pay taxes abroad
• Permanent residence visa abroad
• Family abroad with you

Offset your U.S. tax liability on foreign pensions with the Foreign Tax Credit (FTC)

The FTC is a nonrefundable tax credit which allows you to subtract what you have paid in taxes to a foreign government from what you owe the U.S. government. This credit can be applied to unearned income.

In summary: How to report foreign pension income

This will differ based on how the U.S. government classifies your individual pension, the value of your assets, and other factors.

Potential filing requirements may include: 

• FBAR: FinCEN Form 114
• FATCA: Form 8938
• IRS Form 3520/3520A
• Passive Foreign Investment Companies (PFICs) – Form 8621
  
  

Being retired as a U.S. citizen or Green Card holder - annual checklist

• Align with your CPA/tax attorney/estate planner on inheritance and estate planning as needed
• File the foreign tax return
• File the US tax return 

2023 filing deadlines for Americans living outside the US

About Allyson Lindsey

CPA and COO of Bright!Tax, the premier expat tax filing service for U.S. taxpayers worldwide

Allyson is a recognized expert in expatriate tax issues. She is the winner of the Colorado Society of CPAs (COCPA) 2021 Women to Watch Emerging Leader Award and contributor to the Forbes Finance Council. Bright!Tax clients benefit from her extensive experience in all areas of expatriate taxation, including individual & small business taxation abroad, foreign corporate disclosures, passive foreign investment companies, U.S. tax treaties, and totalization agreements.

D​​isclaimer: Democrats Abroad cannot provide individual tax advice. Advice requires consideration of your individual circumstances and needs, none of which can be done at this event. We are not tax lawyers, accountants, or advisers. Please consult a professional tax adviser/accountant/return preparer when addressing your personal tax matters.

Democrats Abroad does not endorse or recommend companies or individuals attending or hosting this event. The views expressed at the event are those of the respective individuals and companies, not Democrats Abroad. No liability is accepted by Democrats Abroad for the opinions expressed, or for any errors or omissions expressed about matters of tax in any country, your financial planning, or your legal obligations.

If you are in need of tax advice you can consult the IRS Tax Return Preparer Directory to find an advisor or tax return preparer near you or providing online services to meet your needs and budget, though buyers need always beware: https://irs.treasury.gov/rpo/rpo.jsf