The Top 10 US Expat Tax Tips for Americans Retiring Abroad in 2025

More and more Americans are thinking about retiring overseas. The allure of a better quality of life, affordable healthcare, and a later life adventure is a strong draw. Combined with worldwide digital connectivity, allowing you to stay in contact with friends and family, retiring abroad offers a wealth of exciting opportunities.

Americans can’t escape the IRS by relocating overseas, though. However, understanding your US reporting obligations, and taking advantage of available tax reliefs, will help you maximize your retirement income.

In this article, we provide an overview of the most important US expat tax planning considerations when retiring abroad.

US expat tax obligations for Americans retiring overseas

As a US citizen, you have to file a US tax return every year even if you live abroad. The IRS required you to report all your income, including US or foreign pensions, social security payments, and investment income.

Tax deadlines

US expats get an automatic two-month extension to file (until June 15th). However, taxes owed are still due by April 15th.

How can Americans retiring abroad pay less tax?

There are several relief options to help reduce your tax burden. These include the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit. These can help you avoid double taxation on income earned abroad.

The Foreign Earned Income Exclusion

You can claim the Foreign Earned Income Exclusion to exclude income you earn working while abroad from US taxes. To do this, you must meet specific tests. This includes self-employment income. 

However, distributions from IRAs, 401(k)s and investment dividends are considered unearned income, so they can’t be excluded with the FEIE. To claim the FEIE, you have to file Form 2555.

The US Foreign Tax Credit

The Foreign Tax Credit lets you offset foreign taxes by reducing your US taxes by the same value. It’s especially beneficial for US expats who live in high-tax countries, such as many European countries. To claim the Foreign Tax Credit, you have to file IRS Form 1116.

Self-employment social security tax treaties

If you are freelancing part-time in retirement, you are still liable to pay US social security taxes. You may also have to pay local social security taxes. Quite a few countries have social security tax agreements with the US, though. These bilateral agreements – known as totalization agreements – help prevent dual social security taxation when working in both countries.

Case Study: John & Linda in Portugal

After retiring to Portugal in 2025, John and Linda discovered that Portugal’s tax benefits for new residents had changed. With the NHR regime phased out, their US pension is now taxed under Portugal’s standard income tax rules. However, they can use the Foreign Tax Credit on their US return to avoid double taxation. Social Security remains taxable only in the US, thanks to the US-Portugal tax treaty. It’s a reminder that tax landscapes change, and long-term planning is essential.

US tax treaties and their impact on Americans living abroad

The US has international tax treaties with many countries that help determine which country gets the right to tax specific types of income. These treaties often provide reduced tax rates or exemptions for certain income, such as pensions or investment earnings. 

Tax treaties vary by country though, and note that none prevents Americans from having to file a US tax return.

By understanding the treaty provisions between your host country and the US, you may be able to reduce the overall tax burden on your retirement income. However, tax treaties can be complex, so it’s important to consult a US tax professional who is familiar with the particular tax treaty to ensure you’re leveraging the benefits effectively.

Case Study: Susan in Mexico

Susan, a 70-year-old retiree living in San Miguel de Allende, receives Social Security and takes small IRA withdrawals. Thanks to the US-Mexico tax treaty, her Social Security is only taxable in the US, not in Mexico. However, she still has to file a U.S. return annually (and may need to in Mexico too, depending on her Mexican residency status) and carefully tracks her income to avoid unexpected surprises. Her US IRA withdrawals are taxed by the IRS but not Mexico, due to the US-Me. This illustrates how some US tax treaties can reduce taxes, but they don’t eliminate US filing obligations.

Retirement income and taxes for expats

Many US expats have US retirement accounts, including IRAs and 401(k)s, which are often subject to American tax rules even in retirement. Understanding the US and local foreign tax treatment of these accounts abroad is essential as part of your tax planning strategy in retirement.

Tax-deferred accounts (IRAs, 401(k)s

Contributions to these accounts are tax-deferred, but when you withdraw funds, the income is taxed at ordinary income tax rates. If you’re living in a high-tax country that is also taxing these distributions or withdrawals, claiming the Foreign Tax Credit can help offset the tax paid abroad.

Roth IRA accounts

Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals are tax-free in the US. However, depending on the tax treaty between the US and the country where you retire, Roth IRA earnings or withdrawals may or may not be taxed locally. For example, some European countries may treat Roth IRA earnings as taxable if the account doesn’t meet local definitions of a retirement plan.

It’s important to check the specific provisions of the tax treaty between the US and your host country to understand how Roth IRAs are taxed locally.

Taxation of social security payments

Social Security benefits are generally subject to US tax, but many countries have tax treaties with the US that help prevent double taxation of social security distributions. Check with a US expat tax professional who is experienced working with Americans in the country where you live.

Foreign asset reporting for overseas Americans

Americans living overseas are subject to additional several reporting requirements, including the Foreign Bank Account Report (FBAR) and Form 8938 (Statement of Specified Foreign Financial Assets).

• FBAR Filing Requirements: If you have foreign bank (or investment) accounts with an aggregate value of $10,000 or more at any point during the year, you must file an FBAR. Note that not filing can result in steep penalties.
• IRS Form 8938: This form is for specified foreign assets, including foreign financial account balances and certain foreign investments. If your foreign financial assets exceed $200,000 at the end of the year or $300,000 at any time, you must file Form 8938 with your tax return.

While both FBAR and Form 8938 involve foreign financial assets, FBAR is filed separately through FinCEN, while Form 8938 is included with your tax return and has higher thresholds for overseas filers.

Taxation of investment income abroad

As an expat, it’s important to understand how different types of investment income are still taxed in the US:

Dividends

In general, dividends are considered taxable and are taxed as ordinary income in the US.

Annuities

Distributions from annuities purchased with post-tax money will likely have a tax-free part. However, at least some of the income received from annuities will be taxable.

Capital gains from stocks, mutual funds, and bonds

If you’ve held assets for more than a year, gains from sales are taxed at long-term capital gains rates. For assets held less than a year, gains are taxed as ordinary income.

Cross-border tax planning for US expats

As you approach retirement, it’s important to develop a tax-efficient investment and distribution strategy. Diversification of assets across both US and foreign assets can help you minimize tax liabilities and manage risks. 

Furthermore, understanding the interplay of US and local taxes and any benefits available in the tax treaty is invaluable to ensure you minimize your tax bill. Always plan in partnership with both US and local tax professionals who are experienced working with American expats in the country. 

Expat tax experts will help you avoid investment pitfalls too, such as investing in foreign ETFs and mutual funds, which the IRS classifies and taxes as PFICs (Passive Foreign Investment Companies). PFICs often trigger complex reporting obligations and can lead to punitive taxation on gains through excess distribution rules. Talk to our experts.

Case Study: Michael in Thailand

Michael, a 72-year-old retiree in Chiang Mai, invested in a Thai mutual fund, without realizing it was a PFIC under US tax law. This led to a nightmare of paperwork and punitive tax rates. He also rents out a condo locally, which is taxed in Thailand and reported to the IRS. He uses Form 1116 to claim a Foreign Tax Credit and files FBAR and FATCA forms due to multiple Thai financial accounts, as well as complex Form 8621 due to the PFIC investment. Michael’s experience highlights why investing abroad requires extra caution and expert advice.

Currency exposure

If your assets are in one country but your expenses are in another, you may want to hold assets in local currency as well as in the US to reduce transfer fees and reduce the impact of exchange rate fluctuations on your income. 

Note that certain types of foreign investments, such as ETF or mutual funds registered outside the US, can be subject to punitive US taxation, so it’s advisable to consult with an expat-specialist financial advisor to ensure your investments are both tax optimized and compliant.

State and estate taxes

Depending on which state you last lived in in the US and what ties you retain there (such as property, financial accounts, or driving license registration for example), you may still have to file state taxes after you retire overseas. 

The following states are notoriously hard to shake:

• California
• New Mexico
• Virginia
• South Carolina

Talk to the state revenue department and consult a US expat tax professional to explore the best way forward.

You should also research local estate taxes in the country you’re moving to, which may be higher and start at lower thresholds than in the US. Some countries have inheritance laws that specify that certain family members have to inherit a percentage of your estate. So you may need to draft a will in both the US (if you have assets there) and your new country of residence.

Consulting a tax professional for US Expats: Navigating complex tax laws

US expat tax laws are complicated, and mistakes can be costly. If you’re unsure about how to handle your taxes while retiring abroad, consult with a tax professional who specializes in tax planning and optimization for Americans retiring abroad. 

Online Taxman has deep expertise with US tax planning for retiring abroad. We will ensure you’re taking full advantage of available tax benefits, and assist with compliance on reporting requirements for Americans overseas like FBAR and Form 8938.

By understanding your reporting obligations, the available tax reliefs, and the impact of tax treaties, in partnership with a US expat tax expert you can develop a plan that maximizes your retirement income and enjoy financial peace of mind abroad.