USA Taxes when Living Abroad in a Tax Treaty Country (E.G.: Canada?)

[ShokWaveRider]

I was curious how income taxes worked when living in another country in retirement.

Assumptions one has SS Income from USA and 401K / IRA / 457B or other pre-tax retirement vehicle in the USA.

I understand Federal Taxes are Payable on all retirement income in the USA when living aboard. However, taxes are also required by the resident country on the same income.

My question is: If the taxes paid to the resident Tax Treaty covered country are MORE than what is due in the USA on said retirement income, is it also owed to the Federal Government? According to what I can understand, Taxes paid to the USA on SS and IRA withdrawals are deducted from the total Resident countries Tax Bill.

Perhaps folks who actually do this can shed some income. (Alan in the UK?)

 

[NYEXPAT]

Countries that offer a specific "Retirement Visa" do not tax retirement income from overseas! Here in Peru it is called Visa Pensionado and all income generated outside Peru enters the country tax free.

 

[ShokWaveRider]

My question is with reference to countries with a Tax Treaty Like Canada & the UK. In your case Taxes are still due in the USA on US SS and Qualified US distributions.

 

[target2019]

Where there is a tax treaty, income which could be double-taxed is excluded, up to some limit.

 

[Sunset]

Where there is a tax treaty, income which could be double-taxed is excluded, up to some limit.

+1

Lots of people think, you get a credit for all the taxes paid to the "other" country, but that is not true in my experience when the tax paid is a large amount.
So there is a little bit of double taxation.

Worst thing is where something is taxed in 1 country, but tax free in the earning country.

Example, (and this is a guess but I think it would be true). Living in Canada, you earn dividends of $10,000 in the USA. For the USA there will be zero tax, but Canada will tax dividends, so you could end up paying tax on tax free earnings.

 

[ShokWaveRider]

Where there is a tax treaty, income which could be double-taxed is excluded, up to some limit.

If the target country offers socialized medicine, (Canada, UK, France, Spain etc.) would it be worth the extra tax paid I wonder?

 

[target2019]

+1

Lots of people think, you get a credit for all the taxes paid to the "other" country, but that is not true in my experience when the tax paid is a large amount.
So there is a little bit of double taxation.

Worst thing is where something is taxed in 1 country, but tax free in the earning country.

Example, (and this is a guess but I think it would be true). Living in Canada, you earn dividends of $10,000 in the USA. For the USA there will be zero tax, but Canada will tax dividends, so you could end up paying tax on tax free earnings.

That is why I wrote "up to some limit." The question begs for specifics, I think.

 

[Alan]

We have now been through 2 tax years while living as retirees in the UK so can speak as to how it works with the US/UK tax treaty.

Bottom line is that we pay more taxes in total because we pay more to HMRC and the tax credits against our US taxes can only reduce it to zero. However, when adding in what we would pay for health costs then US taxes + health costs is greater than UK taxes + health costs.

Some specific answers to the OP.

UK and US private pensions are taxable in both
US SS is only taxable in the UK
UK SS is taxable in both countries
Dividends and Cap Gains are taxable in both but we pay more in the US and get a foreign tax credit in the UK.
IRA withdrawals are taxable in both.
Roth conversions are taxable only in the USA
Roth withdrawals are tax free in both countries
Interest from UK Individual Savings Accounts are tax free in UK but taxed in USA
Interest from regular savings accounts are fully taxed in USA but the first £1k per person is tax free in the UK

Those are the particulars for us. For all our income from pensions, IRA withdrawal etc the IRS receives no income because tax credits reduce it to zero. If it was not for Roth conversions our US taxes would be zero.

 

[candrew]

Where there is a tax treaty, income which could be double-taxed is excluded, up to some limit.

In many cases the exclusion is limited to "earned" income only.

In other instances, depending upon the treaty's particulars, there is an offset for taxes due in one country that are paid in the other.

And to answer shokwaverider's question - whether or not one deems those expat taxes that are paid to be "worth it" would depend entirely upon one's real and/or perceived value of services rendered (i.e. access to universal healthcare) and/or quality of life trade-offs.

 

[ShokWaveRider]

Those are the particulars for us. For all our income from pensions, IRA withdrawal etc the IRS receives no income because tax credits reduce it to zero. If it was not for Roth conversions our US taxes would be zero.

OK what I understand from this statement is the taxes paid in the UK completely offset those owed in the USA. So the tax credit is applied on the US Tax return Not the UK. Is that correct?

 

[theOAP]

Most assume a 'double taxation treaty' will avoid any double taxation. If you are a US citizen resident abroad, a 30 page treaty will only offer a very few paragraphs that are of benefit to the US citizen. The majority of the treaty will be void thanks to the US saving clause contained in any US treaty.

You do have a definite advantage as regards a US tax return if all of your income is from pensions based in the US. All of your income will be unearned and you will (helpfully) be restricted to foreign tax credits. That is important when resident in Canada and the UK since tax rates in those countries are higher than in the US. It does become important to check carefully the implications for taxation of those pensions in the second country.

As Sunset has pointed out, some income which is tax free (or exempt) in one country will usually be taxed by the other. The golden rule to observe is: whichever country charges the highest tax on any single source of income determines the tax rate for that income. You always pay the sum of the highest tax rates, from whichever country, for each item of income.

If the US and the other country both tax the income, you pay both, then reclaim the tax paid to the second country on the US return via (in your case with the pensions mentioned) the 'resourced by treaty' box of Form 1116, Foreign Tax Credits, provided a treaty exists.

There are other topics being discussed at present on this site concerning the taxation of US Social Security benefits: 0%, 50%, 85%,(etc.). According to the US/UK Treaty and a Totalisation agreement, my US Social Security is not taxed by the US. It is taxed by the UK, at 100%, part of which is taxed at a rate of 40% tax.

Decide which countries you are most interested in, and then research, research, research.

Whatever you do, if you are a US citizen, do not start any type of business, even online, which is incorporated (US terminology - CFC - Controlled Foreign Corporation) thanks to the 2017 tax reform for 2018 and beyond.

 

[Alan]

OK what I understand from this statement is the taxes paid in the UK completely offset those owed in the USA. So the tax credit is applied on the US Tax return Not the UK. Is that correct?

If you read the details above we currently pay more taxes on our cap gains and qualified dividends in the US so get a foreign tax credit for that in the UK tax return. Tax credits work like for like. Complicated!

 

[youbet]

However, when adding in what we would pay for health costs then US taxes + health costs is greater than UK taxes + health costs.

.

Is this for pre-65 USA health costs or Medicare health costs? If pre-65, does it assume ACA with our without subsidy?

 

[Alan]

Is this for pre-65 USA health costs or Medicare health costs? If pre-65, does it assume ACA with our without subsidy?

I went through the ACA process in 2015 and found that my retiree insurance from my former company was much better for us. Each November I still receive all the details plus invitation to enroll in one of my former company’s plans so I know how much it would cost. For 2019 it would be $956/month plus the usual copays, coinsurance, deductibles for health and prescriptions as well as the annual oop max.

For 2016 we paid $5k more in taxes and in 2017 $7k more. I expect a larger difference for 2018 because of the new, lower US tax bands.

As I have said many times before, we live here because of family, friends and our social circles, this was never a financial decision for us.

 

[ShokWaveRider]

I could get a copy of TurboTax Canada and do some math myself. Not sure if there is a Turbo Tax UK version....

 

[Alan]

I could get a copy of TurboTax Canada and do some math myself. Not sure if there is a Turbo Tax UK version....

I use Taxcalc to calculate my UK taxes. It costs £30.

https://www.taxcalc.com/

ETA
The UK taxes individuals, not couples.

 

[youbet]

I went through the ACA process in 2015 and found that my retiree insurance from my former company was much better for us. Each November I still receive all the details plus invitation to enroll in one of my former company’s plans so I know how much it would cost. For 2019 it would be $956/month plus the usual copays, coinsurance, deductibles for health and prescriptions as well as the annual oop max.

For 2016 we paid $5k more in taxes and in 2017 $7k more. I expect a larger difference for 2018 because of the new, lower US tax bands.

As I have said many times before, we live here because of family, friends and our social circles, this was never a financial decision for us.

Is it likely that if someone is on subsidized ACA or is on Medicare, then the situation would change?

 

[Alan]

Is it likely that if someone is on subsidized ACA or is on Medicare, then the situation would change?

There are as many situations as there are different levels and sources/types of income and the need and use of healthcare. All I have done is give you our particular situation as a UK high income couple, £96k/year. If our income was low enough to be on subsidized ACA then our taxes would also be substantially lower and we would still be paying zero for healthcare, including eyetests and prescriptions plus heavily subsidized dental.

From what I understand Medicare is far from free. This year my wife and I have actually made over a dozen visits to the hospital and we have both had 2 outpatient surgeries plus several months of prescriptions associated with our health issues. I can calculate how much this year would have cost under my US retiree health plan and it would be over $15k. I have no clue how much that would have cost on an ACA subsidized plan or Medicare.

For reference, my wife’s taxable income this last year was entirely from interest, qualified dividends and capital gains and came to £25k on which she paid £420 tax. $31.2k income, $546 tax. (I mentioned above that in the UK there is no MFJ, everyone pays tax as individuals.)

 

[brett]

.....Tax Fairness for Americans Abroad Act - Great news for Dual US / Canadian citizens
Solomon Yue (Republicans Overseas) has been fighting hard to introduce a bill to switch citizenship based taxation to a territorial based system. This will end double-taxation and yearly reporting for US citizens living abroad.

12/20/2018 Rep George Holding (R-NC) introduced the TTFI bill and will be voted on in 2019. Here's an email I received from Republicans Overseas:

Today, Congressman George Holding (NC-R) introduced the Tax Fairness for Americans Abroad Act -H.R. 7358: legislation that would end citizenship-based taxation and implement Territorial Taxation for overseas Americans.

Republicans Overseas has worked closely with Congressman Holding’s legislative team to shape this bill and to ensure that the concerns of overseas Americans were addressed. We thank Congressman Holding for genuinely listening to overseas American citizens and for tackling the longstanding problem of citizenship-based taxation.

The TFFAAA will not only end the double taxation of overseas Americans, it will also make Americans more competitive in the international job market and free to pursue opportunities around the world.

The TFFAAA will amend the Internal Revenue Code by offering overseas Americans a status similar to that enjoyed by corporations where foreign-sourced income is taxed in the country where it is earned.

The bill can be summarized as follows:

Overseas American citizens can elect to become a qualified nonresident citizen under this bill or elect to remain taxed under the existing CBT.
Under this bill, a nonresident citizen is defined as an individual that:
Is a citizen of the United States,
Has a tax home in a foreign country,
Is in full compliance with U.S. income tax laws for the previous 3 years, and
Either:
a) Establishes that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
b) Is present in a foreign country or countries during at least 330 full days during such taxable year.
Citizens moving overseas in a ‘split year’ can still make use of the Foreign Earned Income Exemption (‘FEIE’) to cover income earned abroad during the split tax year.
Once a citizen has elected nonresident citizen status, the US government will no longer tax that citizen’s foreign earned income or foreign unearned income.
All income earned by a nonresident citizen within the United States will continue to be taxed under existing laws.
While individuals will not be taxed on gain from the sale of foreign personal property attributable to their time as a qualified nonresident citizen, they will still be taxed on any gain attributable to their time as a resident of the U.S. In other words, if an individual holds a foreign asset prior to their election of qualified nonresident citizen status and then sells said asset while they are a qualified nonresident citizen, the individual will only owe U.S. tax on the portion of gain attributable to the period prior to their change in status.
You can read the full text of the bill [here](http://republicansoverseas.com/wp-co..._H.R.-7358.pdf) and a one-page description of the bill [here](http://republicansoverseas.com/wp-co...ion-122018.pdf).

Republicans Overseas is working with Congressman Holding’s legislative staff and Grover Norquist (President of Americans For Tax Reform) to develop a plan for getting the bill passed in Congress in 2019. We expect that the bill will be attached to a bigger piece of legislation for a vote in the 116th Congress in 2019. I like to call it Holding's ‘FATCA strategy’ (FATCA was attached to the HIRE Act in 2010).

If you would like to do so, we urge you to thank Congressman Holding via Twitter (@RepHolding) for his courageous work in tackling the leviathan of citizenship-based taxation.

In 2019, Republicans Overseas will focus on getting the Tax Fairness for Americans Abroad Act passed.

We thank you for your support over the past year as we’ve worked to get this legislation drafted, and we will need your help to rally support for this bill in the next Congressional session.

I know several US expats living in Canada who have renounced their US citizenship because of the tax and filing issues. They were both firmly established and had no intention of returning. We also know another expat, a 25 year plus resident, who has been considering the same approach. If this bill passes, she may reconsider. In her case she was fortunate enough to win $100K in a lottery. Lottery winnings are not taxed in Canada. She did have to include this in her US tax filing and pay tax.

There are a number of reasonably good free on line tax programs for Canadian tax. We use Studio Tax but there are others.

 

[candrew]

.....Tax Fairness for Americans Abroad Act - Great news for Dual US / Canadian citizens
Solomon Yue (Republicans Overseas) has been fighting hard to introduce a bill to switch citizenship based taxation to a territorial based system. This will end double-taxation and yearly reporting for US citizens living abroad.

In an era of almost unending political polarity and intransigence, the Tax Fairness for Americans Abroad Act -H.R. 7358 also has bipartisan support from Democrats Abroad.

"Democrats Abroad welcomes the introduction of H.R. 7358, the Tax Fairness for Americans Abroad Act. H.R. 7358 is not a perfect bill and, coming on the eve of adjournment, it cannot be given serious consideration or debate. That said, it is a milestone for advocates of a switch from the current U.S. system of Citizenship Based Taxation to the globally-accepted norm of Residency Based Taxation (RBT), and raises to attention important issues that Congress must address with hearings in the 116th Congress."

https://www.democratsabroad.org/ttf_tax_fairness_for_americans_abroad_act

 

[Alan]

I have been following the progress of the TFFAAA and really hope that it actually passes into law. It won’t apply to us because of all our US income and investments but will make life a whole lot easier and less expensive for many thousands, including our son.

He has no US income and like 90% of UK tax payers does not even have to file UK taxes as it is taxed at source using PAYE. However, as a dual citizen he has to file a US tax return every year and although he excludes his foreign earnings he is still subject to US tax on passive income such as interest. As a US citizen he cannot invest in stock funds in the UK, plus other restrictions including adding more than the company match to the UK equivalent of a 401k otherwise it becomes a foreign grantor trust. Even the UK tax free accounts such as Cash ISA’s are still taxed by the IRS. He also has to file FBAR reports every year as a USC living abroad.

 

[theOAP]

There are as many situations as there are different levels and sources/types of income and the need and use of healthcare.

I very much support this statement.

Since the subject is tax and healthcare, I can offer some additional examples which I am familiar with. For the first example, it matters not where the funds come from but is an example of tax rates once taxable income in the UK has been determined.

Person A is a UK resident. Their taxable UK income for 2017 (after deducting the UK personal allowance) was £37,000 ($47,000). Their HMRC income tax on that amount for 2017 was £7,900 ($10,000). Therefore the income tax on $47,000 was 21%. That leaves an after tax disposable income of £29,100 ($37,000). Most purchases made with that remaining £29,100 will have an additional UK National VAT rate (sales tax) of 20% added to the purchase price.

In addition to National Health in the UK, one may also purchase private insurance if they wish.

Person B had private insurance through their employer. in 1997 they underwent a cancer operation and chemotherapy at the UKs' leading private cancer hospital in London. They were in hospital for 4 days. They paid nothing, the insurance covered all.

In October of this year (21 years later), cancer was again discovered. Person B is now retired, but continues to have private insurance through a group policy with that previous employer. 8 days after the cancer was discovered, all tests and scans had been made and Person B was operated on in the same London hospital. The operation uncovered additional concerns (stage 2b) and Person B was in theatre for 6.5 hours. That was followed by 1 day in an intensive care unit and 9 additional days in hospital. Person B is now undergoing chemotherapy at the same hospital.

The private insurance company has warned that this time any mouthwash prescribed (due to side effects of the chemo) will not be covered by the insurance. Everything else will be covered and there will be no additional charges. For 2017, Person B had 'couples' coverage (them and their spouse). For the two, the 2017 premium was £3,200 ($4,050) for the year or £267 ($340) per month.

During the above period, Person B will be attended to additionally by their local NHS doctor if the need arises. Since it's the NHS, there will be no charge for office visits or any additional prescriptions and monitoring.

On a side note, one must be resident in the UK to experience these two examples. For both the UK and the US, the primary way for retirees to become a resident is if at least one spouse, if not both, has citizenship in that country. For permanent residence in the UK, assuming one spouse will need a settlement visa, ILR (Indefinite Leave to Remain) is obtained after 5 years residence and is comparable to a US Green Card. This is not citizenship. For the UK, the process for the non-citizen spouse is:

A spouse visa - duration of the visa is for 2.5 years, therefore 2 are needed. At present, the cost for each is £1,523 ($1,950), or x 2, £3,046 ($3,900). The cost of ILR (the US Green Card equivalent status) is £2,389 ($3,035). In addition, for each spouse visa, there is an NHS surcharge due of £400 ($510) or x 2, £800 ($1,020). The total cost is £6,235 ($7,955). Again, one spouse must already be a UK citizen.