How Totalization Agreements Help Expats Save on Taxes
Living abroad as an American can bring many new experiences, but it doesn’t eliminate your responsibilities to the U.S. tax system. In addition to filing U.S. tax returns, expats may also need to pay Social Security taxes. It can get complicated if you’re required to contribute to both U.S. and foreign social security systems. This scenario often leads to concerns about double taxation, where expats might be taxed twice on the same income. Fortunately, Totalization Agreements are in place to address this issue by determining which country’s social security system you should pay into, thereby preventing dual taxation and simplifying your financial obligations.
This guide will help you understand how these agreements work and how they can benefit you as an expat.
What is a Totalization Agreement for Expats?
Totalization Agreements are international agreements the United States has established with several countries to prevent dual income taxation on Social Security income. These agreements ensure that both nations do not unfairly tax workers who split their careers between the U.S. and another country on the same income.
Current U.S. Totalization Agreement Partners
As of now, the United States has Totalization Agreements with the following countries:
- Australia
- Austria
- Belgium
- Canada
- Chile
- Czech Republic
- Denmark
- Finland
- France
- Germany
- Greece
- Ireland
- Italy
- Japan
- Luxembourg
- Netherlands
- Norway
- Poland
- Portugal
- Slovak Republic
- South Korea
- Spain
- Sweden
- Switzerland
- United Kingdom
These agreements simplify the process of ensuring that Social Security taxes are paid only once. It’s either in the U.S. or the foreign country where the individual works.
The Purpose of Totalization Agreements
Totalization Agreements serve two primary purposes:
- Eliminating Dual Social Security Taxation
When an expatriate works in a foreign country, they might need to pay Social Security taxes in both the U.S. and the host country. The agreement assigns coverage to one country, usually where the expatriate performs the work, and exempts them from paying taxes in another country.
- Filling Gaps in Benefit Protection
For workers who have spent parts of their careers in different countries, these agreements help ensure they receive benefits from both nations. For instance, if an expat has worked in both the U.S. and Germany, their contributions to each country’s social security system can be combined to meet the minimum eligibility for benefits in both countries.
TIP: Totalization Agreements not only prevent dual taxation but also allow for the combination of social security credits from both the U.S. and the partner country. This is especially beneficial if you have short-term work assignments abroad. The agreement ensures you don’t lose social security credits and can still qualify for benefits.
Totalization Agreement vs. Tax Treaty
While both tax treaties and Totalization Agreements aim to prevent double taxation for expats, they serve different purposes and cover distinct areas of taxation.
- Tax Treaties: These govern the taxation of various types of income, such as wages, dividends, and capital gains. They are broad in scope and address issues like which country has the right to tax specific income and how to avoid double taxation on the same income.
- Totalization Agreements: These agreements specifically address Social Security taxes, ensuring that workers pay Social Security taxes in only one country. They focus narrowly on this issue and do not cover other types of taxes.
Need US expat tax advice? Book a consultation now!
How Totalization Agreements Affect Expats
For expatriates, Totalization Agreements offer significant relief by preventing the need to pay Social Security taxes in both the U.S. and their host country. This not only reduces the financial burden but also simplifies compliance with international tax laws.
For example, if a U.S. citizen is working in France, a Totalization Agreement ensures that they only pay into the French Social Security system and are exempt from U.S. Social Security taxes. They can claim this exemption by obtaining a certificate of coverage from the U.S. Social Security Administration.
How It Affects the Self-Employed
Self-employed expatriates often face a unique challenge as they might be liable to pay Social Security taxes in both the U.S. and their country of residence. Totalization Agreements address this issue by stipulating that self-employed individuals only need to pay Social Security taxes in one country, usually the country where they reside and conduct their business.
For instance, if a U.S. self-employed consultant lives in Germany, they would typically only pay Social Security taxes to Germany, not the U.S., under the terms of the Totalization Agreement.
Totalization Agreements Eligibility for Expats
Eligibility for the benefits of Totalization Agreements is based on a thorough analysis of an individual’s work history, the countries involved, and the specific terms of the relevant agreement. The specific facts of each case must be considered to determine which country’s social security system will provide coverage.
For example, the general rule states that workers must follow the country’s social security system where they are physically working. However, exceptions apply, such as when an employer temporarily sends employees to work in another country while those employees remain covered by their home country’s system.
Reporting Requirements and Compliance
Once eligibility is determined, expatriates must comply with the reporting requirements in the relevant countries. This often involves obtaining and submitting certificates of coverage to claim the benefits of a Totalization Agreement.
Certificate of Coverage
A Certificate of Coverage is a document for U.S. expatriates covered under a Totalization Agreement. This certificate is proof that you are subject to the social security laws of one country, which in turn exempts you from paying social security taxes in another. This document helps prevent double taxation and ensures that your contributions are credited where they belong.
For American expats, the Social Security Administration (SSA) or the local country equivalent issues the Certificate of Coverage. To get one, you must formally request one. It’s best to handle this well before the tax filing deadline. This certificate is essential when filing your U.S. tax return, as you’ll need to include it in your tax filing to the IRS.
Without a COC, you might find yourself in a situation where you must pay social security taxes in both countries. This could lead to unnecessary financial stress and might complicate your ability to claim benefits later on.
TIP: Ensure that your Certificate of Coverage (COC) is up-to-date and renewed as needed, especially if your work situation changes. Some countries require annual revalidation of this certificate. Failing to keep it current can lead to unexpected liabilities or loss of benefits.
What If You’re Working in a Country That Doesn’t Have a Totalization Agreement With the United States?
If you’re working in a country that doesn’t have a Totalization Agreement with the United States, you may need to pay Social Security taxes in both the U.S. and your host country. This situation often results in double taxation, as there’s no agreement to prevent contributions to both social security systems. For self-employed individuals, this can be particularly challenging, as you’re responsible for both the employer and employee portions of the tax.
Consulting with a tax professional who understands international tax laws is beneficial in these cases.
Getting Help with Totalization Agreements
Given the complexities involved in determining eligibility and ensuring compliance with Totalization Agreements, we highly recommend that expatriates seek professional tax advice. At Tax Samaritan, we specialize in helping expatriates understand and benefit from these agreements, ensuring compliance with all relevant laws.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.