US Taxes For Expats: What You Need to Consider
You’ve done the hard part – spent the last 30 years of your life working. Now you can enjoy your retirement, and Ecuador is an amazing place to do that.
However, although you are no longer going into an office every day, when deciding to retire abroad, you can’t lay your eyes of the ball and forget about taxation. If you are a U.S. citizen or Green card holder, U.S. tax obligations remain, even as you are relaxing on the beach near Manta or hiking the mountains around Cuenca.
Taxes For Expats has put together a comprehensive retirement tax guide. They’ve also compiled a condensed version specifically for retirees in Ecuador – let’s look at some key tax factors to consider when planning to retire abroad.
3 Things to Know Before Retiring in Ecuador
1. Will My U.S. Pension & IRA withdrawals be taxed?
Distributions from a U.S. employer pension and from Traditional IRA’s will remain fully taxable by the IRS in Ecuador (or anywhere else, for that matter).
The good news – pension distributions will be exempt from U.S. state taxation. If you received those distributions while living in the US, then state tax rate would depend on the tax rules of the state where you live upon retirement, not by the state where you earned it.
Distributions from ROTH IRA will remain non-taxable by the IRS and by your new country of residency. ROTH IRA was funded with after-tax money and therefore will never be taxed again.
Rules for taxation of U.S. Social Security benefits are different depending on your country of residence. Unfortunately, Ecuador is not one of the lucky 8 and your social security benefits will be taxable (if your other income, ie dividends/interest, is above certain thresholds, see below)
Beneficiaries of the U.S. Social Security benefits residing in the following countries are exempt from U.S. tax on their Social Security benefits.
- Italy (You must also be a citizen of Italy for the exemption to apply)
- United Kingdom
If you live in any country not on this list, your U.S. Social Security will be taxable based on the same rules that if would be taxable in the U.S.
“You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.” Source: ssa.gov
If you are a green card holder check the conditions for receiving your Social Security benefit checks.
3) Do I have to buy a US healthcare plan to avoid the ACA penalty?
If you live in Ecuador, you won’t have to buy US healthcare insurance, and you will be exempt from ACA penalties. If you move abroad and plan to stay there for an extended period, you may qualify for the Bona Fide residence status in your new country of residence. As a Bona Fide resident of a foreign country you qualify for exemption from mandatory Healthcare coverage in the U.S.
If you already reached the Medicare age and earned Medicare benefits in the U.S., you do not have to worry about the health care exemption and may stay in the U.S. or abroad for as long as you wish with no risk of ACA penalty. However, you will not have Medicare coverage while living abroad.
If you are below medicare age, the following may apply. If you spend part of the year abroad and part of the year in the U.S., you qualify for an exemption only for the months that you lived abroad and only if you meet the Physical Presence test. You do not need to file form 2555 to claim foreign earned income exclusion.
And there you have it: answers to three common questions about US taxes for expats in Ecuador.
Ines Zemelman, EA is the founder and president of Taxes For Expats, an international tax firm. With over 25 years experience, Ines leads a team of experts to help navigate U.S. tax issues for clients in 175 countries.
Have a question for Ines? Or maybe a tip to share for other expats? Join us in the comments!