Social Security Benefits Paid to US and Non-US Individuals, Including Those Who Expatriated – How Are They Taxed?

A portion of an individual’s US Social Security retirement, survivors, or disability benefits may be subject to Federal Income tax, regardless if the individual is a US or non-US person. Today’s post looks at the US taxation details on US social security benefits for US and non-US persons.  My earlier blog post here discussed the nuances involved with US Social Security for US persons working overseas.

To start off, it’s best to understand the different nomenclature when it comes to certain benefits.  Social Security retirement, survivors, or disability benefits are distinct and are not the same as Supplemental Security Income (SSI) or Special Veterans Benefits (SVB).  SSI and SVB are not taxed. Generally, SSI makes monthly payments to people who have low income and few resources and are age 65 or older; blind or disabled.  Disabled or blind children also can receive SSI. SVB can include a monthly compensation paid to veterans who are hurt or who acquire a medical condition during military service.

Under current law, no federal income tax is paid by any person (whether US or non-US) on more than 85 percent of his or her Social Security benefits. The federal income tax rules and filing requirements are different for US persons and non-US persons.

US Persons

A US person includes a citizen of the United States and an alien who meets the tax definition of a US “resident” alien. A “resident” alien is a US green card holder or a foreign individual who is physically present in the US for substantial time periods. Details can be found in my earlier blog posts here and here.  All other persons are referred to as “nonresident aliens” (NRA).

Generally, if the individual is a US person, he is subject to US income tax filing requirements and worldwide income is subject to US income tax, regardless of whether the individual lives in the US or in a foreign country.  Depending on one’s income level, up to 85% of the Social Security benefits may be subject to tax.  The income levels and filing status will impact the tax result. Full details at IRS Publication 915, here and from the Social Security Administration (SSA) website, here.

Since the SSA does not withhold income tax from Social Security benefits paid to a US person, if the individual is required to pay taxes on his Social Security benefits, he can make quarterly estimated tax payments to the IRS. In lieu of such estimated payments, an individual can choose to have taxes withheld on the benefit payments. This is done by completing Form W-4V, Voluntary Withholding Request.

Non-US Persons – Including Those Who Renounced US Citizenship

Once a US citizen has given up his citizenship, he becomes a NRA (assuming the individual has limited physical presence in the US).  Despite divorcing Uncle Sam, the individual is still entitled to Social Security benefits if the individual was qualified for such payments as a US citizen.  It comes as a surprise to many that the US does not ‘punish’ the individual for renouncing and revoke these privileges earned during the time period as a citizen.  In a nutshell, one can renounce US citizenship thereby avoiding future US taxes on worldwide income and still receive the US Social Security benefits previously earned.

As a NRA, here is how the US will tax those benefits:

If the individual is a NRA for income tax purposes SSA is required to withhold a 30 percent flat income tax from 85 percent of the Social Security retirement, survivors, and disability benefits. This results in a withholding of 25.5 percent of one’s monthly benefit. If a tax treaty applies, the individual may be exempt from this tax, or subject to a lower rate. See IRS Tax Treaty Table Publication, for a list of Treaty countries that exempt or reduce the tax on US social security benefits.

If the individual is a resident of such a treaty country no withholding, or reduced withholding as the case may be, will be undertaken if the treaty benefits are properly claimed. The Social Security Administration will not withhold tax from the benefits (or will withhold at the lower Treaty rate) if the agency is provided with the evidence it requires to show that one qualifies for the treaty benefit.

The address in Social Security records should show the tax treaty country as the country of residence and the beneficiary should actually reside in the tax treaty country.

Evidence an individual has his/her home in a tax treaty country includes, but is not limited to:

• An identification card issued by that government;
• A tax record by that government for the prior year;
• A voter’s registration card issued by that government;
• Evidence of eligibility for welfare and/or health benefits from that country;
• Other recent evidence such as utility bills, etc., showing an address in that country.

The Social Security Administration has a very useful tool to assist individuals in determining whether they can continue to receive their retirement, disability or survivor’s payments outside the United States.

Posted December 22, 2022

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