What the United States Still Taxes When You Retire Abroad
A citizen abroad files a Form 1040 like a resident.
Picture a couple named Montgomery and Lavinia, 66 and 64, who plan to retire in Lisbon. They have Social Security of US$2,400 a month, a US$60,000 retirement account and a rented flat waiting near the river. Montgomery had read that Americans abroad can earn US$132,900 tax free, and he had printed the page for the folder on the kitchen table. "That is more than we will ever draw," he said.
Lavinia read Publication 54 at the same table. It is the guide that the Internal Revenue Service, the United States tax agency, publishes for Americans abroad. She went slowly, because it is long.
"It says the exclusion is for pay for personal services performed abroad," she said. "That means wages, or fees for work. Does a pension count as work?"
They looked at each other. The guide lists what is earned income. Pensions, retirement account withdrawals, Social Security, dividends and interest are not on it.
What they found out
The United States taxes its citizens on income from anywhere in the world, wherever they live. A citizen abroad files a Form 1040 like a resident. Here is what Montgomery and Lavinia wrote down.
| Item | What the public pages say | Year |
|---|---|---|
| Foreign earned income exclusion | US$132,900 per person, for pay for work done abroad only | 2026 |
| Social Security benefits | Taxed under the same rules as at home. None is taxable until income plus half the benefits passes US$25,000 (single) or US$32,000 (joint). Up to 85% is taxable above US$34,000 or US$44,000 | Publication 915 (2025) |
| Foreign account report | Needed if all foreign accounts together topped US$10,000 at any time in the year | Checked October 2026 |
| Form 8938, living abroad | Single: over US$200,000 on the last day or US$300,000 at any time. Joint: US$400,000 or US$600,000 | Checked October 2026 |
The last two rows surprised Lavinia most. A Portuguese bank account and a Lisbon deposit for the flat could pass US$10,000 for a few days in March. The foreign account report goes to a different office, the Financial Crimes Enforcement Network, and not with the return. The penalty for a mistake that was not willful is up to US$10,000, adjusted for inflation.
Where the relief comes from
Portugal taxes a new resident's worldwide pension at its ordinary rates. A special regime for new residents closed to new entrants after 2023, as reported by a Portuguese accounting firm. For taxes paid to Portugal, the United States offers a foreign tax credit (Form 1116), or an itemized deduction, but not both for the same tax. The credit cannot be larger than the US tax on that same foreign income. The treaties with Portugal, Spain and Mexico give the country of residence taxing rights over private pensions. A clause in each lets the United States still tax its own citizens.
Living abroad on 15 April gives an automatic extension to 15 June to file. Interest still runs from April.
You could…
- Ask an accountant who works with Americans abroad whether the foreign tax credit or a deduction suits your mix of income.
- Add up every account you hold abroad on its highest day of the year, and ask whether a report is due.
- Ask your current state's tax office what it counts as leaving, in writing.
- Read Publication 54 once before you go. It is long and plain.
Montgomery put the exclusion page back in the folder. Which sentence about taxes abroad did you have to read twice? Add it below, and a reader still packing the folder may find it useful.
Figures are estimates for planning, based on public data. Rules change, so each figure shows the year it applies to; ask the official office before you act.
Sources: Internal Revenue Service, Publication 54 (December 2025), Publication 915 (2025), Revenue Procedure 2025-32, pages on the foreign account report and Form 8938, and the treaty texts for Portugal, Spain and Mexico at irs.gov; New York Department of Taxation and Finance; California Franchise Tax Board Publication 1031.
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