Retiring abroad may offer a change of scenery, but it does not necessarily mean escaping U.S. taxes. For American retirees who move overseas, the IRS can remain part of their financial lives. Citizens generally owe taxes on worldwide income regardless of where they live, according to IRS Publication 54. Traditional IRA withdrawals, taxable Social Security benefits, and other retirement income may still be subject to federal income tax overseas. A 24/7 Wall Street analysis illustrates the potential cost. A retired couple, both 68, withdrawing $80,000 annually from traditional IRAs and receiving $38,856 in Social Security benefits, could owe roughly $7,367 in federal income taxes. The reason? A commonly misunderstood tax exclusion. Also read: Fidelity’s 4 Roth strategies could save your family a fortune in taxes The Foreign Earned Income Exclusion does not shield retirement checks The first relief most expat retirees hear about is the Foreign Earned Income Exclusion (FEIE) under Internal Revenue Code Section 911, which lets qualifying taxpayers abroad exclude up to $132,900 in foreign wages for the 2026 tax year, the IRS Form 2555 instructions showed. The exclusion sounds broad enough to cover a retirement check, but the statute draws a hard boundary. Under 26 U.S.C. § 911(b)(1)(B), foreign earned income does not include amounts received as a pension or annuity. Social Security benefits are separately excluded because the statute defines foreign earned income under § 911(b)(1)(A) as compensation for personal services actually performed, which Social Security benefits are not. For the couple in the 24/7 Wall Street analysis, the $80,000 in individual retirement account withdrawals and all $38,856 in Social Security deposits fall outside the FEIE’s definition of foreign earned income. Why 85% of Social Security benefits get taxed abroad Section 86 of the Internal Revenue Code amplifies the bill by taxing Social Security benefits using a formula called provisional income, which adds half of benefits to adjusted gross income, as confirmed by IRS Publication 915. For joint filers, the Social Security Amendments of 1983 created the first threshold of $ 32,000, and the Omnibus Budget Reconciliation Act of 1993 added the second threshold of $44,000, according to the Social Security Administration. Neither figure has been adjusted for inflation since. Because those thresholds remain fixed while benefits rise with annual cost-of-living adjustments, the share of households paying tax on Social Security has expanded every year. More Social Security: Social Security’s next COLA could erode on arrival Social Security’s estimator makes one costly assumption Social Security’s biggest check locks out most retirees For this couple, provisional income reaches $99,428, clearing both thresholds and exposing 85% of benefits to taxation, roughly $33,028 of the $38,856, pushing adjusted gross income to $113,028, the analysis calculated. After applying $47,500 in combined deductions, including the 2026 joint standard deduction of $32,200, two $1,650 add-ons for filers over 65, and two $6,000 senior deductions under the One Big Beautiful Bill Act, taxable income falls to $65,528. The first $24,800 is taxed at 10%, and the remaining amount at 12%, resulting in a federal tax bill of $7,367. Outdated Social Security tax thresholds expose more retirees to taxation, leaving couples paying taxes on up to 85% of their benefits. Asia-Pacific Images Studio / Getty Images Foreign reporting penalties can outpace the income tax bill The income tax bill represents only one layer of the cost when retirees move overseas. Foreign bank account reporting requirements have penalties beyond the tax owed, and the most commonly missed form is the Report of Foreign Bank and Financial Accounts (FBAR). Foreign reporting requirements for expat retirees FBAR (FinCEN Form 114): Required when foreign financial accounts exceed $10,000 at any point during the year. Non-willful failure to file now carries a $16,536 maximum per annual report under the Bank Secrecy Act and the Supreme Court’s 2023 Bittner ruling. Form 8938 (FATCA): Required for taxpayers living abroad when specified foreign financial assets exceed $200,000 on the last day of the year or $300,000 at any point for single filers, and $400,000 on the last day or $600,000 at any point for joint filers, the IRS showed. Filing deadline extension: Citizens abroad receive an automatic two-month extension to June 15, but interest on unpaid tax runs from the regular April 15 deadline, the IRS confirmed. Nathalie Goldstein, Co-Founder and CEO of MyExpatTaxes, noted that expat retirees tend to treat the income tax bill as the full obligation, discovering the reporting requirements only after missing a deadline. A lot of expats are surprised to learn that filing and paying are two separate things. Even if your US tax bill ends up at zero, the IRS may still expect a return, Three modest local accounts in a European country can cross the $10,000 aggregate threshold without a retiree realizing it, 24/7 Wall St. noted. How expat retirees can reduce their cross-border tax exposure Mike Wallace, Chief Executive Officer of Greenback Expat Tax Services, recommended that retirees review the applicable tax treaty before relocating. This is because roughly 68 countries, along with approximately 30 Social Security totalization agreements, can assign Social Security taxation to a single jurisdiction. Canada and the United Kingdom, for example, tax Social Security only in the country of residence, eliminating the U.S. obligation. Retirees in high-tax countries can file Form 1116 to claim the Foreign Tax Credit, which offsets U.S. tax dollar for dollar, the IRS confirmed. With the IRS sharing foreign account data across 110 countries under the Foreign Account Tax Compliance Act, the Treasury Department, Greenback Expat Tax Services, and MyExpatTaxes recommend a structured pre-move tax review once retirement income crosses borders. Related: IRS applies 3 tax breaks to just 1 account
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