This post was created by Taxes for expacts

Living abroad can be exciting. However, if you’re a US citizen, it also means navigating tricky tax rules. One of the hardest parts is figuring out how to handle foreign pensions and social security when filing your US taxes and figuring out how to report foreign pensions and social security on your US tax return.

Unlike many countries, which tax only local income, the US taxes its citizens on all income, no matter where it comes from—including pensions earned overseas.

If you receive a foreign pension or social security benefits while living abroad, it’s important to understand how the IRS views this income and what you must report. Common questions are:

  • Is my foreign pension taxable in the US?
  • Do I have to report it?
  • If so, how and where do I report it on my tax return?

This article will answer these questions and help you avoid costly mistakes. Whether your pension comes from a foreign employer or you’re collecting Social Security abroad, understanding the tax rules will ensure compliance and save money.

Are foreign pensions taxable in the US?

Short answer: Yes. Foreign pensions are usually taxable by the IRS. US citizens and resident aliens must report all income earned worldwide, including pensions from foreign governments or employers. This is because the US tax system is based on worldwide taxation.

However, tax treaties between the US and other countries can alter this. Some treaties offer exemptions or special rules that might reduce or even eliminate US taxes on certain pension income. For instance, a treaty may stipulate that the pension is only taxable in the country where it was earned or permit you to claim credits for foreign taxes paid to prevent double taxation. Since treaties vary greatly, it’s important to check the one that applies to your country.

Also, foreign pensions often don’t come with IRS tax forms, such as the 1099-R that you receive with US pensions. This makes reporting trickier and increases the chance of mistakes.

While some expats hope their foreign pension is exempt from U.S. taxes, the general rule is that it isn’t. When dealing with United States expat taxes, it’s essential to report your pension income correctly and look into any treaty benefits or tax credits that could reduce your tax liability.

How and where to report foreign pension income on IRS Form 1040

Reporting foreign pension income on your US tax return can be complicated, especially since you usually won’t receive a tax form, such as a 1099-R, from your foreign pension provider. However, the IRS still expects clear and accurate reporting.

Most foreign pension income is reported on Form 1040, but the exact location depends on the type of income. For regular pension payments, report the total amount received on Line 4a (“Pensions and Annuities”). Then, on line 4b, enter the taxable portion of that amount. If you’re unsure what’s taxable, it’s usually safest to report the full amount, unless you can prove that part of it is a return of after-tax contributions.

One important detail: Foreign pensions must be reported in US dollars. According to the IRS, you can use the exchange rate from the day you receive each payment. Alternatively, if your payments are steady, you can use an average exchange rate for the year. Keep good records of these rates and dates to help you avoid mistakes.

Foreign Social Security benefits are reported differently. Use Line 5a for the total benefits received and Line 5b for the taxable portion. These lines are separate from pension income and follow different rules.

Since you often don’t receive official paperwork from foreign pension plans, it’s crucial to keep detailed records of payments, where they came from, and currency conversions. If you have multiple pensions or annuities, add them all up and report the total.

Remember, if you report foreign pension income incorrectly—or not at all—you risk penalties. When in doubt, reach out to a tax professional who is familiar with expat tax rules.

Foreign tax credit and foreign pension exemptions

Double taxation is a common concern for expats receiving foreign pensions. Fortunately, the US offers two main solutions: the Foreign Tax Credit (FTC) and foreign pension exemptions through tax treaties.

The FTC lets you lower your US tax bill by the amount of tax you’ve already paid to a foreign government on the same pension income. Claim this credit by filing Form 1116 with your tax return. However, keep in mind that claiming the FTC doesn’t exempt you from reporting your foreign pension income; it simply reduces what you owe to the IRS.

Tax treaties can offer additional relief. Some treaties state that certain pension income is exempt from US taxes or is only taxable in the country where it was earned. These exemptions vary greatly depending on the country, so it’s important to check the details of the applicable treaty.

Using treaty benefits often requires filing additional forms or disclosures with your tax return, so make sure you understand the rules.

One final note: neither the Foreign Tax Credit nor treaty exemptions mean you can skip reporting your pension income. Both can be difficult to claim correctly. That’s why many expats find it helpful to work with a tax professional who is experienced in international tax laws.

Special considerations apply to foreign social security and US social security benefits

It’s important for expats to know that foreign and US social security benefits aren’t treated the same way for tax purposes.

If you receive social security-type payments from a foreign government, the IRS typically considers them to be foreign pensions. This means they’re taxable as part of your worldwide income. Report this foreign social security income on Lines 5a (total benefits) and 5b (taxable amount) of your Form 1040, just as you would with US Social Security benefits.

However, US Social Security benefits for expats can have more complex rules. How much of your benefits are taxable depends on your total income, including foreign pension income. There’s also something called the Windfall Elimination Provision (WEP). If you receive a pension from a job that didn’t contribute to US Social Security, like a job with a foreign government, WEP could reduce your US Social Security benefits.

For this reason, it’s important to carefully track both your foreign pension income and your US Social Security income. They can affect how much tax you owe overall.

Some tax treaties also have special rules for social security benefits. Therefore, it’s worth checking the treaty that applies to you. If you’re unsure how your foreign pension or Social Security payments impact your US taxes, talking to a Certified Public Accountant (CPA) who specializes in expat taxes could save you money—and headaches.

Reporting requirements beyond Form 1040

Reporting foreign pension and social security income on Form 1040 is only part of the story. If you have foreign bank or investment accounts tied to your pension, there are other reporting rules to keep in mind.

For instance, if the total value of your foreign accounts exceeds $10,000 at any point during the year, you must file a Foreign Bank Account Report (FBAR) using FinCEN Form 114.

You may also need to file Form 8938, which covers foreign financial assets under FATCA. The filing thresholds depend on your filing status and where you live, and foreign pensions or retirement accounts can count toward these limits.

Missing FBAR or FATCA filings can lead to heavy penalties. That’s why filing your expat taxes isn’t just about Form 1040. Staying on top of these additional requirements often means getting help from a professional who understands all the rules.

What if you’re a non-resident or have special circumstances?

The tax rules become more complicated if you are a nonresident alien for US tax purposes, or if your situation is unusual, such as having dual citizenship, multiple pensions, or living in a country with unique tax treaties.

Non-residents typically only pay taxes on income from US sources. This means that your foreign pension may not be taxable if you qualify as a non-resident. However, determining your tax residency isn’t always simple. It depends on factors such as the substantial presence test and green card status.

Other special cases, such as receiving pensions from several countries, having a non-US spouse, or being a digital nomad, can also affect how you report and pay taxes on your foreign pension income.

Since tax residency, treaties, and filing rules can become complicated quickly, it’s wise to consult a tax professional who is familiar with expat and international tax law. They can help you stay compliant and ensure that you aren’t paying more than necessary.

Conclusion

If you’re a US expat receiving foreign pensions or Social Security benefits, it’s crucial to understand the tax rules. This will help you stay on the right side of the IRS and keep your tax bill manageable.

Foreign pensions are typically taxable in the US, but tax treaties and the Foreign Tax Credit can reduce your tax liability. Reporting your income correctly on Form 1040 and following other filing rules, such as those for the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938, is essential to avoid fines.

Since these rules can be confusing, it is often best to work with a tax expert who specializes in expat taxes. They’ll ensure your taxes are accurate, protect your rights, and help you claim any applicable tax breaks.

This content was produced independently from the Worldcrunch editorial team.