The Working Retiree in Mexico
By Orlando Gotay
Today I am going to write about a subject that is unfortunately as complex as my main discipline, tax law: US Social Security benefits.
Social Security rules are quite complex by themselves, in the “regular” cases, and become even more so when the international “abroad” component is added.
I want to focus on those who are residing in Mexico drawing Social Security retirement benefits, not those on disability or receiving survivor benefits.
You may know there is a “full retirement” age (in my own case 67), but a worker can choose to “retire early” at 62. This discussion is aimed chiefly at those “early” retirees.
The foreign work test
The SSA will withhold benefits for each month a beneficiary younger than full retirement age works more than 45 hours outside the United States in employment or self-employment that is not subject to US Social Security taxes. It does not matter how much you earned or how many hours you worked each day.
A person is considered to be working any day he or she does the following:
• Works as an employee or self-employed person;
• Has an agreement to work, even if the person does not actually work because of sickness, vacation, etc.; or
• Is the owner or part owner of a trade or business, even if the person does not actually work in the trade or business, or the person does not make any income from it.
Ouch¾that’s pretty severe. This means that if you are self-employed, you will meet those 45 hours pretty early in the month (the sixth day), losing the corresponding benefit payment.
From time to time, the SSA sends a questionnaire to determine continued eligibility for benefits. It is important that this questionnaire be completed and returned. If it is not, payments will stop. The questionnaire is not exactly user-friendly, and if you need to report work, you may need to attach parts of your income tax returns. But that is what is needed to ensure you get the allowable benefits. The questionnaire must be signed under affirmation of truth, so think twice about that.
If you (or your employer) paid US income taxes and Social Security taxes on your work, you do not need to worry about the foreign work test, and you will not be subject to reductions on account of it. Also, the foreign work test does not apply once you reach full retirement age.
But don’t forget that all “early” retirees (no matter where they live) are subject to the annual income test in which retirement benefits are reduced (and paid later) if wage income exceeds certain amounts. Plan early, plan ahead, and enjoy Mexico!
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at firstname.lastname@example.org.