A portion of an individual’s U.S. Social Security retirement, survivors, or disability benefits may be subject to U.S. income tax, regardless if the individual is a U.S. or non-U.S. person. Before delving into the details about tax on Social Security, it is helpful to understand the different nomenclature when it comes to certain benefits. Social Security retirement, survivors, or disability benefits are not the same as Supplemental Security Income or Special Veterans Benefits.
SSI and SVB are not subject to U.S. tax. SSI is a needs-based program that provides assistance to certain low-income individuals and SVB involves compensation paid to certain veterans.
Tax on Social Security for U.S. Citizens And Residents
Under current law, no U.S. income tax is paid by any person (whether U.S. or non-U.S.) on more than 85 percent of his or her Social Security benefits. The U.S. income tax rules, however, are very different for U.S. and non-US persons.
Many individuals who are contemplating giving up their U.S. citizenship or relinquishing a green card focus on the possibility of having to pay the U.S. exit tax. Too many ignore the possible impacts on Social Security retirement, survivors, or disability benefits. For example, some of these benefits simply cannot be paid to noncitizens outside the United States.
An often-overlooked financial consequence is the unexpected taxation of U.S. Social Security benefits when one gives up U.S. status. If Social Security represents a significant portion of one’s income, as is typical for many retirees, a very careful analysis is needed. It is possible that retaining U.S. status might be preferable in such cases.
Social Security benefits received by U.S. citizens and residents are taxed under a special IRS formula that is generally more favorable than the flat 30% withholding rate typically applied to nonresident aliens.
The taxation formula for U.S. citizens and residents:
- If combined income (including half of Social Security benefits, adjusted gross income, and tax-exempt interest) is below $25,000 ($32,000 for married joint filers), benefits are not taxable.
- If combined income falls between $25,000 and $34,000 ($32,000 to $44,000 for joint filers), up to 50% of Social Security benefits may be taxable.
- If combined income exceeds $34,000 ($44,000 for joint filers), up to 85% of Social Security benefits may be subject to tax.
- The tax rate applied to this taxable portion is the individual’s marginal U.S. tax rate, which could be lower than the maximum 30% withholding rate applied to nonresidents.
Tax On Social Security Changes Drastically Upon Renunciation or Green Card Abandonment
When an individual gives up U.S. citizenship or U.S. residency, they immediately become a nonresident alien for tax purposes. NRAs face a harsher tax treatment on their U.S. Social Security benefits:
- The U.S. imposes a flat 30% withholding tax on 85% of the Social Security benefits paid to nonresident aliens, resulting in an effective tax rate of 25.5%.
- Unlike U.S. citizens and residents, NRAs cannot offset this withholding by claiming deductions or lower marginal tax rates.
- Some tax treaties eliminate U.S. tax or reduce the withholding rate but many countries have no such benefit.
U.S. Social Security Double Taxation Risk And Tax Treaties
Tax treaties between the United States and other countries can mitigate the impact of double taxation on Social Security benefits. Many treaties allow for reduced withholding rates, while other treaties exempt Social Security benefits from U.S. taxation entirely.
For example, under the U.S.-Canada tax treaty, the country of residence has the right to tax the Social Security benefits. Thus, for the individual residing in Canada, the U.S. Social Security benefits are taxable only in Canada. By contrast, the U.S.-Mexico and the U.S.- Australia tax treaties give the U.S. the right to tax U.S. social security benefits. Under the U.S.-Switzerland tax treaty, the United States retains the right to tax U.S. Social Security benefits paid to Swiss residents, typically at a reduced rate of 15%.
For individuals moving to countries without a favorable treaty, the 30% withholding tax applies, and their new country of residence may impose additional taxation, potentially leading to double taxation. Some countries exempt U.S. Social Security benefits from taxation, but others treat them as ordinary retirement income, subject to local tax rates. Without a tax treaty provision to prevent double taxation, the individual could end up paying tax both in the U.S. and in the new country of residence.
EXAMPLE: Tax on Social Security U.S. v. NRA Status
Let’s walk through a hypothetical example of how taxation would work for a U.S. citizen receiving $27,000 in Social Security benefits and $6,000 in investment income, and then compare it to the taxation after renouncing U.S. citizenship and residing in a non-treaty country, where a 30% withholding tax applies to the Social Security benefits. The analysis would be the same for the U.S. resident (e.g., green card holder) who gives up U.S. resident status.
Scenario 1: As a U.S. Citizen
As a U.S. citizen, the individual is subject to U.S. income tax on worldwide income, including Social Security benefits and investment income. Social Security benefits may be partially taxable depending on the individual’s total income, and the individual can claim the standard deduction.
Step 1: Calculate Combined Income
For Social Security taxation, the IRS uses a formula based on “combined income,” which is defined as:
Adjusted Gross Income (AGI) + Nontaxable Interest + ½ of Social Security benefits.
AGI = $6,000 (investment income, assuming no other income or adjustments)
Nontaxable Interest = $0 (assuming none for simplicity)
½ of Social Security = $27,000 ÷ 2 = $13,500
Combined Income = $6,000 + $0 + $13,500 = $19,500
Step 2: Determine Taxable Portion of Social Security
For a single filer (assuming this status for simplicity), the taxability of Social Security benefits depends on a formula, as set out previously:
If combined income is below $25,000, none of the benefits are taxable.
Since $19,500 is below $25,000, none of the Social Security benefits ($27,000) are taxable as a U.S. citizen in this case.
Step 3: Taxable Income and Tax Calculation
Total income = $27,000 (Social Security) + $6,000 (investment income) = $33,000
Taxable income before deductions = $6,000 (only investment income is taxable, as Social Security is not)
Standard deduction for 2025 (assuming single filer, estimated based on inflation adjustments from prior years) ≈ $15,000 (this is an estimate; the exact figure may differ slightly).
Taxable income = $6,000 – $15,000 = $0 (since the standard deduction exceeds the taxable income).
Step 4: U.S. Income Tax Liability
With taxable income of $0, the U.S. income tax liability is $0. The individual owes no income tax as a U.S. citizen in this scenario due to the standard deduction fully offsetting the investment income and the Social Security benefits being nontaxable.
Scenario 2: After Renouncing U.S. Citizenship, Residing in a Non-Treaty Country
After renouncing U.S. citizenship, the individual becomes a NRA. U.S.-source income, like Social Security benefits, is subject to a flat 30% withholding tax if the person resides in a country without a tax treaty. Investment income taxation depends on its source, but for this example, we’ll assume the $6,000 is from U.S. investments (e.g., dividends or interest), also subject to 30% withholding unless exempt (e.g., portfolio interest). NRAs don’t get the standard deduction or other U.S. citizen tax benefits.
Step 1: Tax on Social Security Benefits
Social Security benefits = $27,000
For NRAs, typically 85% of Social Security benefits are subject to U.S. taxation, and a 30% withholding tax applies to that portion in a non-treaty country.
Taxable portion = $27,000 × 85% = $22,950
Withholding tax = $22,950 × 30% = $6,885
So, $6,885 is withheld from the Social Security payments, leaving the individual with $27,000 – $6,885 = $20,115 after U.S. tax.
Step 2: Tax on Investment Income
Investment income = $6,000
Assuming it’s U.S.-source (e.g., dividends), it’s also subject to a 30% withholding tax.
Tax = $6,000 × 30% = $1,800
After withholding, the individual receives $6,000 – $1,800 = $4,200 from the investment income.
Step 3: Total After-Tax Income
Social Security after tax = $20,115
Investment income after tax = $4,200
Total = $20,115 + $4,200 = $24,315
The total U.S. tax withheld is $6,885 (Social Security) + $1,800 (investment) = $8,685.
Comparison
As a U.S. Citizen:
Taxable income = $0
U.S. income tax = $0
After-tax income = $33,000 (full $27,000 Social Security + $6,000 investment income)
As a Nonresident Alien in a Non-Treaty Country:
U.S. tax withheld = $8,685
After-tax income = $24,315
Key Differences
As a U.S. citizen, the individual pays no U.S. income tax due to the standard deduction and low combined income keeping Social Security nontaxable.
After renouncing citizenship and moving to a non-treaty country, they lose the standard deduction and face a flat 30% withholding on 85% of Social Security ($6,885) and 30% on U.S.-source investment income ($1,800), reducing income by $8,685.
Minimizing Tax Impact Social Security, Planning Strategies
For individuals relying heavily on U.S. Social Security benefits, losing U.S. status whether by expatriation or abandonment of the green card can result in a significant loss of income due to increased taxation. Proper planning strategies include reviewing tax treaties to determine the impact of the move and exploring alternative residency options in treaty-favorable countries.
Timing the expatriation strategically can help minimize the tax impact on Social Security benefits. Expatriation in the middle of a tax year creates a dual-status tax return, which can have different tax treatment depending on timing. Some may benefit from expatriating at the start of a year to simplify tax reporting, while others might prefer year-end expatriation to maximize deductions or credits.
The sources of income should be examined to determine how that income will be taxed after expatriation and whether alternative investments should be made (e.g., U.S. source income is taxable but many exceptions exist such as portfolio interest on notes and bonds).
Conclusion
Before making the decision to renounce U.S. citizenship or residency, consult with a tax professional who specializes in international tax matters. Without proper advice, one’s retirement income could be significantly and unexpectedly diminished.
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