The endorsement of an elective residence-based taxation model by former IRS Commissioner Charles Rettig and former IRS Commissioner Counselor Tom Cullinan, covered in my earlier Forbes article, has sparked important discussions about fairness for Americans abroad. Their piece highlights the burdens of America’s citizenship-based tax system and calls for a shift to treat expats more equitably. An astute reader recently emailed me and our correspondence hammered out that details matter in an RBT model, especially for older expats. What happens to Social Security and pension payments if you elect RBT? Could the shift to nonresident alien (NRA) status trigger a 30% U.S. withholding tax that erodes retirement savings?
This is a significant concern. More than 1 million Americans over 65 live abroad, many depending on U.S.-sourced retirement income. Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act (H.R. 10468) permits expats to elect NRA treatment and thus be taxed only on U.S.-source income, with relief from worldwide reporting like FATCA. It’s a major step forward. For overseas retirees, however, the 30% withholding on passive U.S.-source income, including Social Security and pensions, poses a real risk unless addressed.
Residence-Based Taxation Waiver of Savings Clause
LaHood’s bill has the United States waive so-called treaty saving clauses. The “savings clause” embedded in most treaties ensures that the United States retains the right to tax its citizens as if the treaty did not exist. The savings clause “saves” or preserves a country’s right to tax its own citizens despite the treaty, regardless of the individual’s residence or other ties to a treaty country.
The savings clause waiver found in LaHood’s bill reads as follows:
“(8) WAIVER OF TREATY SAVING CLAUSE.—The United States waives the application of each saving clause in any United States income tax treaty with respect to electing individuals. For purposes of the preceding sentence, the term ‘saving clause’ means any provision which would (but for this paragraph) prevent the electing individual from benefitting from a provision of the treaty eliminating double taxation.”
While the proposal is not fully clear on this point, the waiver apparently allows those electing into RBT to access the treaty benefits even though they are U.S. citizens. Such benefits might include complete exemptions from U.S. tax on certain types of income or reduced withholding tax rates. However, the savings clause waiver lacks explicit protections for seniors who heavily rely on U.S. Social Security or pensions. RBT can and should better safeguard these payments.
The Current Tax Challenges For Retiree Expats
Under the current citizenship-based system, U.S. citizens abroad report worldwide income on Form 1040. Social Security benefits are often not taxable if income stays below $25,000 (single) or $32,000 (joint) for 2025, although up to 85% of Social Security benefits can be taxed otherwise. Private pensions are fully reportable. Foreign tax credits are available to offset double taxation. A very big issue is U.S. tax and reporting compliance for expatriates: annual tax returns, FBARs, and Form 8938 tax filings that can cost retirees hefty fees each year.
RBT changes this scenario once the individual elects RBT, meets the requirements and is granted a “nonresidency certificate” by the IRS. Once elected, the individual is treated as an NRA for U.S. income tax purposes: no worldwide income reporting, just tax on U.S.-source items. For working expats, this is often a clear win.
For retirees, though, U.S. retirement income (such as Social Security and pension payments) become the focus. As an NRA, such retirement income is generally subject to 30% withholding as U.S. source income. The Social Security Administration withholds 30% on up to 85% of benefits for NRAs, effectively 25.5% net, unless a treaty applies. Private pensions and annuities face the same flat 30% rate. Without proper tax planning and advice, one’s retirement income could be significantly and unexpectedly diminished with a change in U.S. status.
For example, a 72-year-old widow resident in a non-treaty country receiving $2,000 monthly in Social Security could lose $6,120 a year (about 25% of her income) to the 30% withholding tax imposed on 85% of her Social Security benefits. In a treaty country like France, Social Security benefits would remain taxable by the U.S. at the full 30% withholding rate, while in Switzerland, a reduced treaty rate of 15% applies to such payments. Canada’s income tax treaty with the U.S. provides a different and more favorable tax result, with Canada having sole taxing rights (up to 85%) on U.S. social security paid to a Canadian resident. That said, a very significant number of expats live in non-treaty countries, such as parts of Latin America or Southeast Asia, leaving them with the full 30% withholding rate on U.S. Social Security.
Residence-Based Taxation: Every Treaty Mandates Close Scrutiny
Clearly, treaty provisions on U.S. Social Security and pensions aren’t one-size-fits-all. If RBT eventually becomes law, expats considering an RBT election must pore over the specifics of their host country’s agreement with the U.S. to assess the impact of making this election. Each country’s agreement demands a close read to uncover the true effects of making an RBT election especially with respect to retirement income. Treaty provisions often treat Social Security and private pensions differently, leaving expats to navigate a maze of reserved taxing rights.
Some treaties slash or eliminate U.S. withholding on private pensions but Social Security frequently falls under a carve-out reserving full U.S. jurisdiction. This could leave the individual with the default 30% rate on up to 85% of benefits unless the treaty explicitly exempts it. It is not at all clear that RBT’s saving clause can override some of these provisions especially for government benefits like Social Security. If RBT becomes a reality, the taxpayer should consult the fine print of the treaty and get professional advice before making an election.
The U.S.-Australia income tax treaty offers a good example of the complexity. Under Article 18(2): “Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.” This Article 18(2) reserves exclusive U.S. taxation on Social Security for Australian residents or U.S. citizens ensuring the U.S. retains sole control over its citizens’ benefits, no matter where they live. This clause pairs with the treaty’s saving clause exception in Article 1(4)(a), meaning even under current citizenship-based rules, U.S. Social Security stays taxable only by the U.S., with no Australian tax permitted.
For RBT electors in Australia, the saving clause waiver recasts the individual as an NRA, stripping away U.S. citizen status for tax purposes and making the citizen prong of Article 18(2) irrelevant. However, the individual receiving U.S. Social Security will apparently still be caught by the independent residency prong (“an individual who is a resident of the other Contracting State”), which locks in exclusive U.S. taxing rights and the default 30% withholding. The savings clause waiver found in the RBT proposal might neutralize the broader citizenship override so that treaty benefits are possible, but in my view, the waiver alone can’t dismantle the built-in source-country rules found in the treaty. This example demonstrates why RBT requires a treaty-by-treaty deep dive and why it lacks any kind of uniform protection for retirees abroad.
What About OBBBA’s Senior Deduction? Can It Help RBT?
The One Big Beautiful Bill Act became law on July 4, 2025 and provided a new deduction for seniors. The new rule provides a $6,000 above-the-line deduction ($12,000 for those filing jointly) for taxpayers who are 65 and older and within certain adjusted gross income thresholds. The deduction phases out for higher earners. For a single senior filer, this senior deduction stacks on top of the 2025 standard deduction of $15,750, for a total of $21,750 in deductions, saving significant taxes on modest income.
NRAs generally don’t qualify for either the standard deduction or the senior deduction. The senior deduction links strictly to U.S. residency or citizen filing status. As such, an expat retiree making the RBT election would pay fully on U.S.-source income through 30% withholding (absent a favorable treaty), while their stateside counterpart would get a significant tax break with the combined standard and senior deductions. This presents an inequity in a law that was meant to ease senior burdens.
Residence Based Taxation: Suggestions For Retiree-Friendly Reforms
RBT’s structure is strong overall and a good start, but seniors need more targeted support. A “retiree relief” provision could be added to the RBT, for example, capping withholding on Social Security or pensions at 15% across the board. To address the senior deduction gap, RBT could extend OBBBA’s $6,000 deduction benefit to electing NRAs on U.S.-source income, perhaps prorated by treaty rates. Someone in a treaty country granting 15% withholding, for example, would get partial relief; someone in a country without a treaty would get the full amount. The revenue cost would probably be low, given the limited filer pool.
In an era of global mobility, the U.S. tax system needs to support expats, not hinder them. RBT gets closer to the goal, but it can and should work better for everyone, including those enjoying a well-earned retirement abroad.
Posted October 23, 2025
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First published on Forbes October 10, 2025
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