Facts about Social Security for US Expats in Costa Rica

Here are 5 lesser-known facts about US Social Security the every Ex-Pat should know.

Social Security is often the foundation of retirement plans but many Americans have been paying into the system for years without knowing how the system actually works – especially when they retire abroad. Here are 5 lesser-known facts about Social Security that any retiring ex-pat needs to know.

Qualifying for Social Security benefits is really easy

To receive benefits at retirement, you must simply earn 40 "credits" over at least 10 years of work. This boils down to about $1,200 a quarter, which is so low that you could probably qualify by working a seasonal job! Many ex-pats contribute to the US Social Security system even when living abroad so the ex-pat status does not "exempt" one from Social Security benefits.

In addition, if you earned money in the US and paid into the US system, the credits you earned will remain on your Social Security record.

You can receive Social Security benefits overseas

Eligible US citizens can receive benefits when living abroad, with a handful of small exceptions. The Social Security Administration (SSA) is prohibited from sending payments to Cuba or North Korea but they will send all withheld payments you were eligible for once you leave the restricted country. Note that non-US citizens cannot receive payments for the months they lived in Cuba or North Korea, even if they move to a country where payments are allowed.

There are also a handful of countries where payments cannot be made, but for the purpose of this article we are talking about Costa Rica and yes you can receive your benefits here.

The Social Security system isn't penniless (yet)

According to the 2014 annual report from the Social Security Board of Trustees on the financial status of the program, without policy changes, the combined Social Security trust funds will become depleted and unable to pay scheduled benefits in full on a timely basis in 2033. After that, Social Security could pay about three-fourths of scheduled benefits through 2089.

Analysts and reports differ as to what year the funds will begin to fall short but the guesstimate has remained between 2029 and 2042 for the past 20 years. Americans are encouraged to diversify their retirement portfolio to ensure they don't rely too heavily on benefits that may (or may not) be available when they are needed.

Totalization Agreements prevent dual-taxation

The US has entered into agreements with 24 countries to ensure expats are not forced to pay into two Social Security systems. These agreements allow you to choose which system you would like to pay into.

If you are self-employed, this may not the case, as self-employed individuals are generally subject to the US Social Security system. These taxes are included in self-employment taxes, currently 15.3%, and are assessed on net business income. However, in countries with a Totalization Agreement, self-employed individuals who are subject to self-employment tax in the foreign country will be exempt from US self-employment tax. A certificate of coverage must be obtained from the country of residence to provide proof of the individual's participation in another Social Security plan.

Self-employed individuals will be subject to dual taxation if they choose to live in a country with which the US does not have a Totalization Agreement, as in Costa Rica.

SSA benefits may be taxed

No matter where you go, US taxes will follow! US citizens and residents can expect up to 85% of Social Security benefits may be subject to federal income tax. How much is actually taxable depends on the total amount of your benefits and other income you receive.

Generally, the greater your total income, the higher the taxation. The taxes are calculated as follows:

Up to 50% of your benefits will be taxed if your income is greater than $25,000

Up to 85% of your benefits can be taxable if either of the following situations applies:

  • The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly)
  • You are married filing separately and lived with your spouse at any time during the year.

It is important to note that many foreign governments tax US Social Security benefits so we encourage you to check your country's tax laws to get an accurate picture of your overall taxation.

Note: This article was written by David McKeegan and edited for Costa Rica, all credit goes to David.


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