Retiring Abroad Won’t Get You Off the IRS’s Radar. Here’s What Expat Retirees Still Owe
Most retirees who move abroad assume the IRS loses interest the moment they land. The paperwork waiting for them on the other side tells a very different story.
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Picture a retired couple, both 68, who sell the house, ship the dog and move into a seaside apartment in southern Europe. They’re a composite, but plenty of real retirees make the same assumption these two do: that the IRS stopped caring the day the plane took off. The IRS still requires a return.
The U.S. taxes its citizens on income earned anywhere in the world. IRS guidance says citizens must report foreign income “whether you reside inside or outside the United States”. That means their Social Security, pension and money pulled from retirement accounts all still go on a Form 1040. For our couple, the federal bill comes to about $7,400 a year.
Foreign Earned Income Exclusion Ignores Your Retirement Checks
The first break most expats hear about is the foreign earned income exclusion in Section 911. It covers wages earned abroad. The statute says foreign earned income does not include amounts “received as a pension or annuity” (26 U.S.C. § 911(b)(1)(B)(i)).
IRA distributions, Social Security, dividends and capital gains count as unearned income, so the exclusion does nothing for them. It only helps retirees who pick up paid work in their new country.
How $80,000 in IRA Withdrawals Turns Into a $7,367 Federal Bill
The assumptions: tax year 2026, married filing jointly, both spouses 68, no other income. Their Social Security matches the average aged couple at $3,238 a month, or $38,856 a year. On top of that, they withdraw $80,000 from IRAs.
The IRS starts with “provisional income”: the IRA money plus half of Social Security, which totals $99,428. Section 86 makes benefits taxable once a joint return passes $32,000, and more of them are taxed above $44,000. Neither threshold has ever been indexed to inflation. Our couple clears both by a wide margin, so the maximum 85% of their benefits gets 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 line adds up three pieces: the 2026 joint standard deduction of $32,200, an extra $1,650 for each spouse 65 or older, and the temporary senior deduction of $6,000 per person. Only the dollars above $24,800 are taxed at 12%. Everything below that line is taxed at 10%.
Next year this rises up. A 3.6% COLA raises the average couple’s benefit to $3,355 a month in 2027.
Foreign Tax Credit Can Stop You From Paying Twice
If your new country taxes the same income, Form 1116 lets you claim a foreign tax credit. It generally cuts U.S. tax on that income dollar for dollar, up to limits. Tax treaties add another layer, and some assign Social Security to just one country. The terms vary from treaty to treaty, which is why the IRS points readers to Pub. 901, U.S. Tax Treaties.
Paperwork Penalties Can Cost More Than the Tax
- FBAR (FinCEN 114): required when your foreign accounts together exceed $10,000 at any time during the calendar year. That’s a combined total, so three modest local accounts can trigger it.
- Form 8938: Section 6038D requires it once foreign financial assets pass $50,000, “or such higher dollar amount as the Secretary may prescribe.” The IRS sets higher thresholds for taxpayers living abroad.
- Deadline: citizens abroad get an automatic 2-month extension to file, which moves the date to June 15. Interest on any unpaid tax still runs from the regular April 15 due date.
Medicare Premiums and the Exit Taxes Can Follow You Abroad
If you stay enrolled in Part B, Medicare sets your premium from the income on your U.S. return. Our couple’s AGI sits well below the 2026 joint IRMAA cliff of $218,000. A big Roth conversion or property sale could push them over it. That would raise each spouse’s premium from $202.90 to $284.10 a month.
Giving up citizenship has a cost too. Section 877A levies an exit tax on “covered expatriates.” That includes anyone with a net worth of $2,000,000 or more and anyone who can’t demonstrate compliance for the 5 preceding taxable years. A poor filing history alone can put you in that group. Your old state may also keep taxing you if you hold onto a home, a driver’s license or voter registration there, and those rules differ from state to state.
Most Expensive Mistake Expat Retirees Make
The most common mistake is assuming the foreign earned income exclusion covers retirement income and skipping the return entirely. The FBAR follows close behind. It’s one of several requirements that can quietly cost retirees six figures, and we charted the rest in a free tax trap map. Before you move, run the treaty, the foreign tax credit and the IRMAA math with a CPA who works with expats.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
