Totalization Treaties

With US tax filing being mandatory for US citizens living abroad, the threat of double taxation is very real. While deductions, credits, and tax treaties can help offset income taxation, what about taxes paid into a foreign country’s Social Security system? Fortunately, this is where Totalization Treaties can help prevent expats from being double taxed when contributing to their retirement benefits.

In this article, we’ll define Totalization Treaties, explain who benefits from them, and look at ways these treaties can help you avoid paying unnecessary taxes and ensure compliance with international tax laws and agreements.

What Is a Totalization Treaty?

Totalization Treaties are international agreements between the United States and another country designed to prevent dual taxation on Social Security benefits. These agreements also help fill benefit gaps for expats who divide their careers between the US and foreign countries.

The United States has Totalization Treaties with 30 countries across the world:

For specific treaty terms regarding the country where you reside, consult the Social Security Administration’s complete list of US International Social Security Agreements.

Who Benefits from Totalization Treaties?

Totalization Treaties primarily affect the Social Security obligations and benefits of expat employees, self-employed expats, and retirees.

• Expat Employees: As a US expat working abroad, a Totalization Treaty helps determine whether you pay Social Security taxes to the US or the country where you work. This ensures you’re only paying into one system at a time. Generally, this should not be an issue if you work for a local employer. However, it may be useful if you are working for a US employer abroad and want to be exempt from Social Security tax withholding.
• Self-Employed Expats: The rules for self-employed expats are highly variable depending on your source of income, nationality, and tax residency status. If no treaty exists between the US, you must pay US self-employment tax on worldwide self-employment net income. Sometimes, you can earn Social Security credits in both countries if you pay in both.
• Retirees: Workers who have divided their careers between the United States and a foreign country may end up contributing to Social Security in multiple countries. Totalization Treaties can help retirees combine these earned work credits to meet the eligibility threshold for benefits in either country.

What’s the Difference Between a Tax Treaty and a Totalization Treaty?

While Totalization Treaties and tax treaties help prevent expats from double taxation, the two have key differences. Let’s break it down:

• A Tax Treaty establishes which country has the right to tax particular types of income, including wages, investments, and pensions. Without a tax treaty in place, an expat may have to pay taxes on a single income to both the US and their host country.
• A Totalization Treaty specifically coordinates Social Security benefits between the two countries. This ensures you only contribute taxes to one country’s benefit programs. These treaties also allow retirees to combine work credits to qualify for retirement benefits.

Depending on the circumstances and the treaties between the US and your host country, it is possible to benefit from both a tax treaty and a Totalization Treaty. That means you won’t be double taxed on your earned income or Social Security contributions. By the same token, if you live in a country without a treaty in place with the US, you may wind up being double taxed on both.

Am I Eligible for Totalization Treaty Benefits?

Whether or not you are eligible to benefit from a Totalization Treaty depends on specific criteria. These include whether you have dual nationality, your work history, whether you’re employed or self-employed, length of stay abroad, and the terms of the agreement with your host country and the United States.

Each treaty is different and includes specific rules and stipulations. You may need to apply for a Certificate of Coverage through the Social Security Administration or your local country’s government to confirm your eligibility. This certificate serves as proof that you are covered by your host country’s Social Security system, which means you do not have to contribute to both. This certificate may be difficult to obtain, so based on your unique situation, other local tax documents may do the trick.

Questions About Totalization Treaties?

Do you need help navigating the ins and outs of Totalization Treaties? Our friendly Tax Professionals are available to answer your questions and help you take full advantage of any treaties in place. Start today by signing up for a free account on MyExpatTaxes. Answer a few questions using our award-winning software, and pay only when you upgrade or are ready to file!

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