Retiring in another country may feel like a clean break, but for U.S. citizens it does not end IRS obligations. A retired couple who moves abroad can still face annual federal taxes, and in many cases the bill is far from trivial.
Quick Read
U.S. citizens are taxed on worldwide income no matter where they live, which can leave a typical expat couple with an annual IRS bill of about $7,367.
The Foreign Earned Income Exclusion applies only to wages earned overseas, and it does not cover pensions, IRA withdrawals, or Social Security.
FBAR penalties can apply if combined foreign account balances exceed $10,000 at any point in the year, and missing the filing can cost retirees six figures.
Consider a retired couple in their late 60s who sell their home, move their belongings overseas and settle into a coastal apartment in southern Europe. Many retirees make the same assumption: once they leave the U.S., the IRS stops paying attention. It does not.
American citizens remain subject to tax on income earned anywhere in the world. IRS guidance says citizens must report foreign income whether they live inside or outside the United States. That means Social Security, pensions and withdrawals from retirement accounts still belong on a Form 1040. In this example, the couple’s federal tax comes to roughly $7,400 a year.
Foreign Earned Income Exclusion Does Not Cover Retirement Income
The tax break most expats hear about first is the Foreign Earned Income Exclusion under Section 911. But that rule is aimed at wages earned abroad. The statute excludes amounts received as a pension or annuity.
IRA distributions, Social Security, dividends and capital gains are treated as unearned income, so the exclusion does not shield them. For retirees, it only matters if they take on paid work in their new country.
How $80,000 in IRA Withdrawals Becomes a $7,367 Federal Tax Bill
Assume a tax year in which a married couple filing jointly are both 68, have no other income and receive Social Security matching the average aged couple, or $3,238 a month, which equals $38,856 a year. On top of that, they take $80,000 from IRAs.
The IRS uses “provisional income,” which combines the IRA withdrawals with half of Social Security, for a total of $99,428. Under Section 86, benefits become taxable once a joint return passes $32,000, and more of them are taxed above $44,000. Those thresholds have never been indexed for inflation. In this scenario, the couple is well beyond both levels, so the maximum 85% of their benefits is taxed.
Line | Amount |
|---|---|
IRA withdrawals | $80,000 |
Social Security That's Taxable | $33,027.60 |
Adjusted gross income | $113,027.60 |
Standard deduction, 65+ add-ons, senior deduction | $47,500 |
Taxable income | $65,527.60 |
Federal tax | $7,367 |
The deduction total here combines the joint standard deduction, extra amounts for each spouse age 65 or older, and a temporary senior deduction of $6,000 per person. Only income above $24,800 is taxed at 12%; everything below that is taxed at 10%.
A year later, the number rises. A 3.6% COLA lifts the average couple’s monthly benefit to $3,355 in the following year.
Foreign Tax Credit Can Help Prevent Double Taxation
If the country you move to also taxes the same income, Form 1116 can let you claim a foreign tax credit. In many cases, it reduces U.S. tax on that income dollar for dollar, subject to limits. Tax treaties add another layer, and some treaties assign Social Security taxation to only one country. The rules vary, which is why the IRS directs readers to Publication 901, U.S. Tax Treaties.
Paperwork Mistakes Can Cost More Than the Tax Itself
Failing to file required forms can be expensive. One of the biggest risks is the FBAR, which applies when foreign account balances exceed $10,000 at any point during the year. Noncompliance can bring severe penalties even when no additional tax is owed.
Medicare Premiums and Exit Taxes Can Still Reach You Abroad
If you remain enrolled in Part B, your Medicare premium is based on the income reported on your U.S. tax return. In this case, the couple’s AGI is far below the 2026 joint IRMAA threshold of $218,000. A large Roth conversion or a property sale could push them above it and raise each spouse’s monthly premium from $202.90 to $284.10.
Giving up citizenship also carries a tax cost. Section 877A imposes an exit tax on covered expatriates, including people with a net worth of at least $2,000,000 and those who cannot show tax compliance for the previous five taxable years. Even a poor filing record can place someone in that category. A former state may also continue taxing you if you keep a home, driver’s license or voter registration there, and those rules differ by state.
The Costliest Mistake Expat Retirees Make
The most common error is assuming the Foreign Earned Income Exclusion applies to retirement income and then skipping the return altogether. The FBAR is another frequent miss. Together with other filing requirements, these mistakes can quietly cost retirees large sums. Before moving, it is wise to review treaty rules, the foreign tax credit and Medicare premium effects with a CPA who works with expats.