Taxes When You Retire Overseas

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

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Paying taxes when you live overseas is complicated. Here are two situations regarding tax laws that apply to U.S. citizens living abroad.

Will You Pay Tax on Your Pension Income if You Move Out of the Country?

Let's say you plan to retire overseas, but you're concerned about how much tax you would have to pay on your 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. 

According to the IRS website page U.S. Citizens and Resident Aliens Abroad, "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. After applicable deductions are factored in, 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.

What if You Have Dual Citizenship and Your Spouse Passes While You're Living in Another Country?

Suppose you and your spouse retire to a foreign country. Your spouse has a 401(k), and you are the beneficiary. If your spouse passes away before you do, does the 401(k) automatically get transferred to your name as part of inheritance? Is it taxable income in the United States?

If you are the primary beneficiary of your spouse'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. But you have to make sure the 401(k) plan processes this correctly. You should find a tax professional or advisor in your retirement home country who is familiar with both U.S. and that nation's tax regulations.

Additional Resources on Taxes When You Live Overseas

If you're thinking about retiring overseas, check out the International Living website. It offers 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, the 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.