Do Retired Americans Living Abroad File and Pay U.S. Taxes?

Do Retired Americans Living in a Foreign Country Pay U.S. Taxes?

Retired Americans Abroad and U.S. Taxes

In the past 10 to 20 years, it has become much more common for Americans to retire overseas in a foreign country instead of the United States. That is because, generally, the cost of living can be much less in a foreign country than in the U.S. And, even if the American resides overseas they can still collect their U.S. Social Security. Thus, between social security and pension, many Americans can live a nice lifestyle without having to stress about the cost of living like living in the United States. The question then becomes when Americans retire overseas do they still pay US taxes?

The answer is usually yes, but it could depend on a few different factors.

Worldwide Income/Citizenship Based Taxation

First, it is important to understand how the US tax system works. Unlike most countries, the United States follows A worldwide income/citizenship-based taxation model. What that means is that taxpayers who are considered US persons for tax purposes, such as U.S. citizens and lawful permanent residents are subject to US tax on their worldwide income. Thus, the mere fact that the American retires overseas does not automatically eliminate the requirement for them to file and pay U.S. taxes.

Filing Tax Returns vs. Owing U.S. Taxes

But, while a U.S. person may be required to continue filing U.S. tax returns, they may not have any net effective tax liability. That is because if the U.S. citizen has already paid taxes overseas (foreign tax credit) or qualifies for the foreign earned income exclusion (FEIE), they may be able to reduce or eliminate any U.S. tax liability.

U.S. Citizen or Lawful Permanent Resident?

Many people consider themselves to be Americans, but that does not necessarily mean that they are U.S. Citizens. Oftentimes, lawful permanent residents also consider themselves to be Americans when they have been living in the United States for a significant amount of time. Thus, if the person is a lawful permanent resident and not a U.S. citizen, they may qualify for a treaty election to be treated as a non-U.S. Person for tax purposes.

Tax Treaty Election

If the United States enters into a treaty with a country in which an American resides and the person is considered to be a resident or lawful permanent resident of the United States (it usually does not apply to U.S. citizens), then they may qualify to make a treaty election to be treated as a foreign person instead of a US person for tax purposes. If they qualify for such a treaty election, they may qualify to only be taxed on their US income and not their worldwide income. And, instead of filing a Form 1040, they would file a Form 1040NR along with an annual Form 8833 treaty election form.

Formal Expatriation

After living overseas for many years, some American citizens decide they do not want to go back to the United States — or if they do want to return, it does not require that they maintain their US citizenship. Therefore, a taxpayer may consider formally expatriating from the United States in order to give up their US citizenship or if they are a lawful permanent resident, to relinquish their lawful permanent resident status. Taxpayers who are considering expatriating must be aware of the various covered expatriate and exit tax rules which could result in an exit tax at the time they expatriate from the United States, along with future taxes if they were to give gifts to certain US persons.

Did You Miss Reporting in Prior Years?

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.