Recently I had a client for Global Thinkers Tax Services ask me about US Social Security Taxes for their “non-resident alien” wife who will soon be receiving their US Social Security Benefit. They wanted to know;
- Will that benefit be taxed
- If so, how much?
- If so, how can they legally minimize or nullify the tax?
The short answer is YES! About 25.5% of the benefit will be withheld as “tax”. And yes, there is a way to minimize or even get that tax down to zero.
To be more specific, if you are a nonresident alien receiving retirement, disability or survivor benefits, SSA will withhold a 30 percent flat tax from 85 percent of those benefits unless you qualify for a tax treaty benefit. This results in a withholding of 25.5 percent of your monthly benefit amount.
An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.
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HOW MANY NON-RESIDENT ALIENS GETTING BENEFITS ARE OUT THERE?
We don’t exactly know!
There are probably millions of non-US citizens who once worked in the United States and paid taxes into the social security system and who now are legal residents of other countries. The US Social Security Department does NOT publish that data so we don’t the exact number. However, we can guesstimate that it is probably over 1,000,000 people for sure.
My wife happens to also be classified as a “non-resident alien” and is already receiving Social Security Benefits. So I know about this first hand. So allow me to share the knowledge.
WHY ARE US SOCIAL SECURITY BENEFITS TAXED FOR NON-RESIDENT ALIENS?
I mean they earned the income when they were working in the USA and then paid into the social security system dutifully without issue. So why tax them on the money that is theirs to begin with?
I mean, they could have kept the money and invested it themselves for retirement. After all, the whole purpose of this system is to force Americans to save for retirement and give it back to them when they reach a certain non-working age, right?
Not so fair eh?
Many things are NOT fair and this is one of them. So we will need to take that up with the US Congress. Nevertheless, that’s the law and for this article, we are dealing with the law and NOT the justice or morality of that specific law.
HOW ARE NON-RESIDENT ALIENS TAXED ON SOCIAL SECURITY BENEFITS?
Non-resident aliens are typically taxed on U.S. Social Security benefits because the United States generally taxes income earned within its borders, regardless of the taxpayer’s citizenship or residency status.
This taxation principle is known as “source-based taxation.”
When it comes to Social Security benefits, the U.S. government may withhold taxes on these payments based on the recipient’s residency status and any tax treaties that may exist between the U.S. and their country of residence. However, even if a tax treaty exists, it may not always fully exempt Social Security benefits from taxation.
Furthermore, the U.S. tax system distinguishes between residents and non-residents for tax purposes. U.S. residents are generally taxed on their worldwide income, while non-residents are typically taxed only on their U.S.-source income and income effectively connected with a U.S. trade or business.
Non-resident aliens who receive Social Security benefits but do not reside in the U.S. may still be subject to U.S. taxation on those benefits because the payments are considered U.S.-source income. However, the tax treatment can vary depending on the specific circumstances and any applicable tax treaties.
It’s important for non-resident aliens receiving Social Security benefits to understand their tax obligations. In addition, most people should consult with tax professionals or legal advisors familiar with international tax laws to ensure compliance and optimize their tax situation.
HOW TO GET A REFUND?
If a foreign person is receiving Social Security benefits from the USA and believes they have been overtaxed, they may be able to reclaim those taxes by filing a U.S. tax return.
Here’s a general overview of the steps they might take:
- Understand the Tax Treaty: The first step is to understand if there’s a tax treaty between their country and the United States. Tax treaties often dictate how Social Security benefits are taxed for non-residents. They may provide provisions for reducing or eliminating taxes on such benefits.
- Gather Documentation: Collect all relevant documents related to their Social Security benefits, including forms sent by the Social Security Administration (SSA) and any tax documents received from the U.S. government.
- File a U.S. Tax Return: They would need to file a U.S. tax return, typically Form 1040NR (U.S. Nonresident Alien Income Tax Return) or Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents), depending on their circumstances.
- Claiming Refund: On the tax return, they can claim any deductions or credits that apply to them, including those related to Social Security benefits. This may involve providing information about the taxes withheld on their benefits.
- Wait for Processing: After filing the tax return, they would need to wait for the IRS to process it. The processing time can vary, so they should be prepared for some delay.
- Receive Refund: If the IRS determines that they have overpaid taxes on their Social Security benefits, they will issue a refund for the excess amount.
- Consult a Tax Professional: Given the complexities of U.S. tax law and the potential implications for international tax treaties, they should consult with a tax professional who has experience dealing with international tax matters. This can help ensure they are taking full advantage of any available tax benefits and complying with all relevant regulations.
It’s important to note that tax laws and procedures can vary depending on individual circumstances and may change over time, so they should seek up-to-date and personalized advice from a qualified tax advisor or attorney.
NEED MORE ASSISTANCE?
Global Thinkers Tax Services can help. Just send us an email at email@example.com and we will consult at no cost.
Johnny Punish is the founder and owner of GlobalThinkers.money. He is also a writer, global citizen eco-activist, visionary, musician, artist, entertainer, businessman, investor, life coach, and syndicated columnist. His home base since the late 1990s is Mexico.
Punish was educated at the University of Nevada Las Vegas (1980-81) and California State University Fullerton (1981-1984) with studies in accounting and business. Before the “internets” had been invented, he owned and ran (5) national newspapers in the United States of America from 1987-1998. In addition, he created and ran the important online media sites; HireVeterans.com (2004-2020) and VT Foreign Policy (2004-2023).
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