Keeping it shot and sweet …
Yesterday I had a conversation about renouncing U.S. citizenship. The person was living almost entirely on U.S. Social Security benefits.
Any reduction in those benefits would have a significant impact on the family budget.
The individual had not considered how renunciation (becoming a nonresident alien for U.S. tax purposes) might affect the U.S. taxation of Social Security benefits. In many (but not all) cases renouncing U.S. citizenship (or abandoning the Green Card) will result in increased U.S. taxation of your Social Security. You will end up with less Social Security. For some people this may not matter. But, some cannot afford a reduction in their Social Security payments.
(In general renunciation of U.S. citizenship or Green Card abandonment will NOT impact WHETHER you are entitled to U.S. Social Security benefits. It will impact HOW those benefits are taxes by the United States.)
Conclusion as expressed in the following tweet:
Explanation:
If you are receiving and/or are eligible to receive U.S. Social Security benefits you must understand:
1. If you renounce U.S. citizenship you cease to be a U.S. citizen and become a “nonresident alien” for tax purposes.
2. Under the Internal Revenue Code, for certain kinds of income, U.S. citizens are taxed differently from nonresident aliens.
3. Tax treaties govern which country has taxing rights over U.S. Social Security. After having renounced U.S. citizenship you may or may not live in a country with which the U.S. has a tax treaty.
If you do not live in a country where there is a tax treaty, taxation of U.S. Social Security follows the rules in the Internal Revenue Code.
If you do live in a country where there is a tax treaty, taxing rights will be allocated in the tax treaty. The rules will vary from country to country.
For example:
– Under the Canada/US treaty the country of residence has the right to tax Social Security benefits.
– Under the Mexican and Australian treaties the U.S. has the right to tax U.S. Social Security.
4. If the tax treaty gives the U.S. the right to tax U.S. Social Security benefits, the U.S. will tax those benefits (you have renounced) under the rules applicable to nonresident aliens. It is possible that the taxation of your Social Security as a nonresident alien is higher than the taxation of Social Security payments as a U.S. citizen.
Conclusion: If you are considering renouncing U.S. citizenship (or abandoning your Green Card) you must consider how becoming a “nonresident alien” will impact the U.S. taxation of U.S. source income (especially Social Security).
An excellent summary of this issue is here.
An excellent article (with detailed examples) by U.S. tax lawyer Virginia La Torre Jeker is here.
John Richardson – Follow me on X.com/ExpatriationLaw
