Retire Abroad U.S. Tax Guide

So you have just retired, now what? You’ve decided to spend your golden years in a foreign country. We don’t hold it against you! Retirement abroad for U.S. citizens is all about enjoying life to the fullest. Many Americans spend years daydreaming of a picturesque expat retirement, sipping champagne in the Italian countryside, or taking daily strolls along a picture-perfect tropical coastline.

For many people, planning for all the exciting aspects of retirement abroad can take precedence over thinking about the more fundamental elements of retirement abroad, such as taxes. This is one of the most common retirement pitfalls. Whether you’ve only recently conceived the notion of spending your golden years abroad or are a seasoned expat, it’s critical to understand that even expats who live and work in the United States must pay U.S. taxes.

Yes, you read that correctly: even if you are an expat enjoying retirement in a foreign country, you may still be subject to United States taxation. If you are still a citizen of the United States, regardless of where you live in the world, you are still accountable for your U.S. tax obligations. We’ve outlined the essentials of what you need to know about taxes in an expat retirement in the sections below.

Does a Retiree Need to File Taxes?

Do I need to file taxes after retirement? If you retire outside of the United States, you will leave the country, but not the tax system, because the United States taxes income based on citizenship rather than residence. The IRS minimum thresholds, which usually begin at around $12,000 per person (although these thresholds can be lower, for example, just $400 of self-employment income), mean that American citizens living abroad must still file a federal tax return every year if their global income exceeds certain thresholds.

To qualify for this exemption, all worldwide income must be included in the calculation. This includes social security payments, pension distributions, dividends, bank interest, and rental income, as well as any post-retirement employment or self-employment earnings.

Individuals who retire abroad may also be required to file a state tax return in the state where they last resided, depending on the tax regulations in that state, which are frequently dependent on whether or not they have ties to the state in the form of property, dependents, financial accounts, or other means of support.

The combined total balances of their foreign financial accounts (including bank and investment accounts) may exceed $10,000 at any point during the year, in which case Americans who retire and have financial accounts abroad may be required to disclose those accounts by filing a Foreign Bank Account Report (FBAR).

​How to Avoid Double Taxation

American citizens who pay foreign income taxes in the nation where they retire can claim the U.S. Foreign Tax Credit when they file their federal income tax return by completing IRS Form 1116 and submitting it to the Internal Revenue Service. The Foreign Tax Credit allows them to claim tax credits in the United States based on the amount of foreign taxes they have paid. For Americans who choose to retire in a country with a greater income tax rate than the United States, this will eliminate their U.S. income tax liability. Those who pay less or no foreign tax than their theoretical U.S. tax bill, on the other hand, are frequently required to pay some amount of U.S. tax.

Pensioners who still earn some income, such as through freelance work or consultancy services, can claim the Foreign Earned Income Exclusion on Form 2555, which allows them to exclude their earned income from their taxable income. The FEIE will enable them to deduct up to just over $100,000 of their earned income from their U.S. tax liability each year under certain conditions.

A provision in some of the international tax treaties that the United States has signed provides for the prevention of double taxation on retirement income, such as social security income and pension distributions. On the other hand, the terms differ from case to case, and such provisions, when advantageous, must be claimed on Form 8833.

How to File Taxes

​Filing U.S. taxes from abroad is more complicated. It is always advisable to seek advice from a U.S. expat tax professional like TFX, who will be intimately acquainted with all of the forms and circumstances that Americans who retire abroad may encounter, and who will guarantee that they file most efficiently and beneficially possible to maximize their benefits.