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July 31, 2016


Another tax concern for ceratain expats: Social Security payments

For U.S. taxpayers who work abroad, keeping on the right side of regulations poses ongoing headaches and challenges.

Some American expatriates have given up their U.S. passports in response. Others have found foreign banks unwilling to deal with them, due to concerns about the compliance burdens of the Foreign Account Tax Compliance Act (FATCA).

In this post, we will inform you about yet another potential source of foreign-income problems: double taxation for payments into Social Security.

Consider the case of an American woman who worked in Morocco as a tour guide and freelance writer and paid into that country’s Social Security system.

Quite to her surprise, the IRS took the position that she also had to pay Self-Employment Social Security (SESS) tax. This is a tax that applies in the U.S. and to certain U.S taxpayers who work abroad.

Part of the tax is for Social Security and part of it is for Medicare – even though expat taxpayers receive no benefits from Medicare.

For Social Security, the woman had already been taxed by Morocco. So taxing her again for Social Security was double taxation.

Not every expat faces this double hit. Approximately 25 counties around the world have entered into an agreement with the U.S. to keep two countries from imposing self-employment taxes for Social Security on the same person. But neither Morocco nor any other country in the Middle East has signed that agreement.

Regardless of where you live as an expat, you might think the Foreign Earned Income Exclusion would help you avoid double taxation for Social Security. After all, that exclusion prevents the first $101,300 of income from earned from employment from being taxed.

But the Foreign Earned Income Exclusion doesn’t apply to SESS taxes.

Tax Controversy