Story of Two Pensioners: Introducing Senior Tax Reduction and Foreigners' Social Security Payments
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces a temporary deduction for senior citizens, but it does not extend this benefit to foreign nationals living abroad who are Non-Resident Aliens (NRAs).
Under the OBBBA, taxpayers aged 65 or older are eligible to claim a $6,000 deduction per individual, or $12,000 for married couples filing jointly. This deduction applies to all sources of income, including Social Security benefits, and phases out at higher income levels. However, it is not specifically tailored for foreign nationals living abroad.
For U.S. taxpayers abroad, including citizens and foreign nationals who may be receiving U.S. Social Security, the law maintains citizenship-based taxation with no shift towards residence-based taxation or special expansions on foreign earned income exclusions. The existing tools like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) remain available but do not affect Social Security benefit taxation itself.
The taxation of Social Security benefits for foreign nationals living abroad continues to be based on their income, up to 85%, just as under prior law. This means that NRAs may have up to 85% of their Social Security benefits taxed, resulting in an effective tax rate of 25.5% due to the U.S.'s flat 30% withholding tax.
The OBBBA does not address the 30% withholding tax imposed on NRAs receiving U.S. Social Security benefits, leaving a significant disparity in how income earned through equal payroll tax contributions is taxed based solely on citizenship or residency status.
Many countries have no tax agreements with America that eliminate or reduce the withholding tax on Social Security benefits for NRAs. As a result, foreign individuals who have paid into the U.S. Social Security system for decades and later return to their home countries may be subject to a withholding tax regime on U.S.-source income, including U.S. Social Security benefits.
In summary, Social Security benefits for foreign nationals living abroad continue to be taxable under the same rules as before, but many seniors benefit from a new standard deduction for taxpayers over 65, which reduces taxable income including that from Social Security. No special exclusion or exemption for expats is included in this Act.
- The One Big Beautiful Bill Act (OBBBA) introduces a new income tax deduction for senior citizens, but it does not provide a similar benefit to non-resident aliens, even those receiving U.S. Social Security benefits.
- The OBBBA does not address the withholding tax on Social Security benefits for non-resident aliens, creating a significant disparity in taxation based on citizenship or residency status, especially as many countries have no tax agreements with America to reduce or eliminate this withholding tax.
