Taxes When You Retire Overseas

Retiring overseas does not automatically exempt you from U.S. taxes.

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Retiring overseas does not exempt you from U.S. taxes. TaraMoore/Taxi/GettyImages

Paying taxes when you live overseas is complicated. Below are two reader questions I received about tax laws that apply to U.S. citizens living abroad.

Will I Pay Tax on My Pension Income if I Move Out of the Country?

"I am a member of the Sheet Metal Workers Union. If I were to move out of the country, how much tax would I have to pay on my pension income?"

Unless you are planning to renounce your citizenship, the U.S. federal tax you pay will be the same, even if you live overseas.

 

The IRS website page U.S. Citizens and Resident Aliens Abroad says, "If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."

The actual amount of tax you pay each year is calculated just as it is when you are working - your total income flows into your tax return including any investment income from non-retirement accounts. Then applicable deductions are factored in. Then you get your taxable income and the appropriate tax rate is applied to each segment.

You also need to check on the tax rules for whatever country you would be living in. Some countries base their tax rules on residency instead of citizenship.

Dual Citizenship and Spouse Passes While Living in Another Country

"My husband and I worked in the USA for more than 10 years and have Social Security and 401(k) accounts. We moved to Australia and are both Australian citizens, while I have kept my USA citizenship as well. My husband has over $200k in a 401(k), of which I am the beneficiary.  He is now retired and is terminally ill. Should my husband pass away before I do, does the 401(k) automatically get transferred to my name, i.e, part of inheritance? Is that taxable income in the USA?"

For this person, I referred them to the same IRS web page above. Beyond that, I am not familiar with Australia/U.S. dual citizen situations. If you are the primary beneficiary of your husband's 401(k), you should be able to either keep it as an inherited IRA or roll it over into your own IRA. In such a situation, you will only pay tax on any amounts you withdraw.

A rollover (assuming it is done correctly) is not a taxable event. You have to make sure the 401(k) plan processes this correctly, though. You ought to find a tax professional or advisor in Australia that is familiar with both U.S. and Australian rules."

Additional Resources on Taxes When You Live Overseas

If you're thinking about retiring overseas, one website you might check out is International Living. They have a lot of information for adventurous U.S. citizens who are looking to move abroad.

You should also thoroughly investigate a country's tax laws and any arrangements that country has with the U.S. This IRS page on Researching Tax Treaties is a good place to start.

In addition, this IRS page titled Expatriation Tax discusses the tax provisions for U.S. citizens who have renounced their citizenship or ended their U.S. resident status for federal tax purposes.