FEIE Impact on Social Security: A Real Tax Question from Expats

Updated on March 31, 2024

This week, we're addressing a common inquiry about the Foreign Earned Income Exclusion (FEIE) and its impact on US Social Security income. Here's the scenario.

The Scenario

A single U.S. citizen in Costa Rica, self-employed with US Social Security income, asks: "How does the FEIE affect the taxability of my US Social Security income? Does the IRS consider income before or after applying the FEIE?"

US Taxation of Social Security Income

Social Security income is typically non-taxable, but it can be taxable up to 85% when combined with other income sources. The thresholds for taxation depend on your filing status:

Individual Filers: Taxable up to 50% if combined income is $25,000-$34,000; up to 85% if over $34,000.
Joint Filers: Taxable up to 50% if combined income is $32,000-$44,000; up to 85% if over $44,000.
Married Filing Separately: Likely taxable on benefits.

Tax Treaty Considerations

First, examine any relevant tax treaty. In the absence of a treaty, default to standard US rules. For a U.S. citizen in Spain, for example, the US-Spain treaty grants the US the right to tax Social Security payments.

FEIE and Its Impact

FEIE allows excluding up to $120,000 of earned income from US taxes. However, Social Security isn't "earned" income, so it’s not excluded. The IRS requires adding back the excluded income when calculating Social Security taxability. Thus, even with $100,000 of excluded self-employment income, 85% of Social Security benefits could be taxable.

Conclusion

This scenario highlights the intricate interaction between FEIE and Social Security taxation. Always consult a qualified tax professional to navigate these complexities.