Why Could Your Social Security Suddenly Drop by 25.5% After Giving Up a Green Card?

After the previous articles in this series, someone considering retirement in China may feel that two of the biggest questions have been answered.

First, maintaining a U.S. green card may become increasingly difficult after someone begins living primarily in China.

Second, even if the green card is eventually given up, a Chinese citizen who meets the applicable overseas-payment requirements may still be able to receive U.S. Social Security benefits earned through years of work in America. Eligible spouses and survivors may also be able to continue receiving benefits.

That may seem to settle the issue.

But there is another number that people may not notice until their first reduced Social Security payment arrives.

Suppose someone worked in the United States for twenty or thirty years and receives:

$3,000 per month in Social Security.

The person later retires permanently to China and eventually gives up the green card.

Social Security may continue to be paid. But if the person becomes subject to the tax rules for a nonresident alien, the amount actually received each month could fall to:

$2,235.

The difference is:

$765.

That is exactly:

25.5% of the original benefit.

Over one year, that would be $9,180.

Over 20 years, using a simple calculation that ignores COLAs (Cost-of-Living Adjustment), future tax-law changes, and other factors, the total would be:

$183,600.

Why can giving up a green card lead to such a large difference?

The answer is not primarily found in immigration law.

It is found in tax law.

The 25.5% is not a “penalty for losing your green card”

The first point is important.

The U.S. government does not have a rule saying:

“If you give up your green card, your Social Security will be reduced by 25.5%.”

Nor has the Social Security benefit itself necessarily been reduced.

What may have changed is something different:

the person’s status under U.S. tax law.

SSA distinguishes between U.S. persons and foreign persons for these purposes. U.S. citizens and people who qualify as resident aliens under U.S. tax rules are generally treated as U.S. persons. A person classified for tax purposes as a foreign person — specifically, a nonresident alien, or NRA — may become subject to a different withholding system for Social Security.

That means there are at least three concepts that need to be kept separate:

U.S. citizenship

U.S. permanent resident status

U.S. tax residency

They are related, but they are not identical.

Giving up a green card can therefore be an important step toward a change in tax status. But the disappearance of the physical green card itself is not what triggers the 25.5% withholding.

The critical issue is whether the Social Security recipient is now treated as a nonresident alien for U.S. tax purposes.

That distinction matters.

Otherwise, a tax rule can easily be misunderstood as a punishment imposed on people who surrender permanent residence.

Where does the 25.5% come from?

The number itself looks unusual.

Why not 10%?

Why not 20%?

Why exactly 25.5%?

The calculation is actually straightforward.

For nonresident aliens subject to this rule, SSA generally withholds tax on 85% of the Social Security benefit at a rate of 30%.

In other words:

85% × 30% = 25.5%.

If the monthly Social Security benefit is $3,000:

$3,000 × 85% = $2,550

$2,550 × 30% = $765

So the amount remaining is:

$3,000 − $765 = $2,235.

SSA describes the rule directly: for a nonresident alien subject to this withholding, 30% tax is withheld from 85% of retirement, survivor, or disability Social Security benefits. The effective withholding therefore equals 25.5% of the total benefit.

SSA performs this withholding on behalf of the IRS.

So 25.5% is not part of the formula used to calculate someone’s Social Security entitlement.

It is tax withholding.

That explains why a person’s underlying Social Security benefit may still be $3,000 while the amount actually deposited into the bank account is substantially lower.

This is very different from how Social Security is taxed for U.S. residents

The reference to “85%” can cause another misunderstanding.

Many retirees have heard a different Social Security tax rule:

“Up to 85% of your Social Security can be taxable if your retirement income is high enough.”

That sounds similar, but it is not the same calculation.

For U.S. citizens and qualifying U.S. tax residents, whether Social Security is taxable generally depends on filing status, other income, and the applicable federal income-tax rules.

When people hear that “up to 85% of Social Security can be taxable,” that does not mean the government takes 85% of their benefit. Nor does it mean that 85% is automatically taxed at a 30% rate.

A retiree whose Social Security is the primary source of income may owe relatively little federal income tax.

The nonresident-alien system is different.

Absent an applicable treaty benefit, Social Security paid to an NRA can be subject to withholding at 30% on 85% of the benefit rather than simply being combined with other income and taxed through the ordinary individual income-tax brackets.

That is why a change in tax status can produce such a visible difference.

The retiree has not necessarily earned more income.

The underlying Social Security benefit has not necessarily gone down.

Yet because the tax treatment has changed, the amount actually received each month may fall by roughly one-quarter.

Does “Withholding” Mean You Can Get the Money Back When You File a Tax Return?

The word “withholding” can create an understandable misunderstanding. Does it mean the tax is merely being withheld temporarily and that, when a tax return is filed later, the amount will be reconciled and potentially refunded in the same way as ordinary wage withholding?

For a nonresident alien subject to this rule, that is generally not how it should be understood.

If the recipient was in fact a nonresident alien subject to this rule during that tax year, and no applicable tax-treaty exemption or reduction applied, the effective 25.5% withholding generally represents the U.S. federal tax imposed on those Social Security benefits. If the person later obtains a green card again or otherwise becomes a U.S. tax resident, that later change in tax status does not automatically create a right to recover tax that was properly imposed in earlier years.

A refund may be available when the tax was overwithheld or withheld incorrectly for that particular year. For example, if the recipient was not actually subject to the nonresident-alien rule that year, or an applicable tax treaty entitled the recipient to a lower rate or an exemption but 25.5% was nevertheless withheld, the excess may be claimed through the appropriate U.S. tax-filing procedure for that year.

So “withholding” in this context should not simply be understood as “the government holds the money now and recalculates everything at year-end.” Whether a refund is available depends on the tax that was legally owed for the year in which the withholding occurred—not on whether the person’s U.S. tax status changes several years later.

Can the U.S.–China tax treaty eliminate the 25.5%?

This deserves special attention.

The United States and China have an income tax treaty.

So a reasonable question is:

“If I am a resident of China and the two countries have a tax treaty, why is the United States still withholding tax from my Social Security?”

The answer is found in the treaty provisions governing pensions and social security payments.

The U.S. Treasury Department’s official Technical Explanation of Article 17 of the U.S.–China income tax treaty distinguishes private pensions from government social security payments.

Under the treaty, private pensions arising from employment are generally treated under the residence-country rule. But public social security payments made by one country may be taxed only by the paying country.

For U.S. Social Security, the paying country is:

the United States.

The United States therefore retains the taxing right.

As a result, a Chinese citizen who has given up a U.S. green card, becomes a nonresident alien for U.S. tax purposes, and lives permanently in China cannot eliminate the U.S. tax on Social Security simply by claiming Chinese residence under the U.S.–China tax treaty.

In other words:

The United States and China do have a tax treaty, but that treaty does not transfer the taxing right over U.S. Social Security from the United States to China.

That is a crucial point in understanding the 25.5% withholding.

The result can be different if you retire in another country

This also reveals something that is easy to overlook.

Simply “living overseas” does not determine whether Social Security will be subject to the full 25.5% withholding.

Tax treaties can change the result.

SSA states that nonresident aliens are generally subject to the 30%-on-85% withholding rule unless a tax treaty provides an exemption or a lower rate.

So imagine two retirees who are both no longer U.S. tax residents.

One retires in China.

The other retires in a country whose tax treaty with the United States provides more favorable treatment for Social Security.

Even if they have identical Social Security benefits, the amounts ultimately received may differ.

Some countries even have special reduced rates. For example, SSA currently describes a 15% withholding rate on the total Social Security benefit for certain qualifying residents of Switzerland rather than the standard effective rate of 25.5%.

That means cross-border retirement planning should not stop with the question:

“Can the United States send my Social Security to this country?”

It should also ask:

“If I become a resident of this country, how will the United States tax my Social Security?”

Those are two very different questions.

What does the difference look like over time?

Return to the original example.

Suppose the retiree receives:

$3,000 per month in Social Security.

If the 25.5% NRA withholding applies:

Monthly withholding:

$765

Monthly amount received:

$2,235

Annual withholding:

$9,180

Using a simple static calculation:

5 years:

$45,900

10 years:

$91,800

20 years:

$183,600

Of course, this is not a precise forecast of anyone’s future tax cost.

Social Security benefits are generally adjusted through COLAs. Tax laws may change. A person’s tax residency may change as well.

So $183,600 should not be interpreted as an amount that someone is guaranteed to lose over the next twenty years.

The example illustrates a broader point:

Tax residency is not a minor detail in cross-border retirement planning.

If Social Security is one of a retiree’s primary sources of income, a 25.5% difference each month can become financially significant over ten or twenty years.

Spousal and survivor benefits can face the same issue

The previous article discussed spousal and survivor benefits.

If a Chinese citizen qualifies to continue receiving these benefits while living in China, that does not necessarily mean the full amount will reach the beneficiary.

The NRA withholding rules can apply to qualifying Title II retirement, survivor, and disability benefits.

So when a recipient is a nonresident alien subject to the withholding rule, survivor benefits may also face the effective 25.5% withholding.

Suppose a widow is entitled to:

$2,800 per month in survivor benefits.

If she lives permanently in China, is no longer a U.S. tax resident, and is subject to the 25.5% NRA withholding:

$2,800 × 25.5% = $714

The amount she actually receives would be approximately:

$2,086 per month.

This can be particularly important for a surviving spouse living alone.

The household has already gone from two people to one, and its total Social Security income has already declined. NRA withholding can reduce the amount available for living expenses even further.

But do not automatically equate “no green card” with “NRA”

One important boundary still needs to be kept in mind.

Tax residency is more complicated than simply asking whether someone has a green card.

After a person gives up permanent resident status, exactly when that person becomes a nonresident alien and how the transition year should be reported may depend on the date permanent residence ends, the number of days spent in the United States, tax-residency rules, and other circumstances.

The reverse is also important.

Someone who still holds a green card should not simply assume that living overseas automatically ends U.S. resident tax obligations.

SSA itself emphasizes that for NRA withholding purposes it relies on IRS definitions of citizenship and tax residency, which do not necessarily match definitions used for every other Social Security purpose.

So retirement planning should not rely on an overly simple formula:

“Green card = U.S. tax resident”

“No green card = NRA”

The year in which status changes can be particularly complicated and may warrant advice from a professional familiar with cross-border taxation.

But for the typical situation discussed in this series — a Chinese citizen who formally gives up a green card, moves permanently back to China, and no longer qualifies as a U.S. tax resident — the potential 25.5% Social Security withholding is a real number that should be included in retirement planning.

This turns “Should I become a U.S. citizen first?” into a financial question

At this point, the issues discussed throughout the series begin to connect.

Suppose someone returns to China for retirement while still holding a green card.

Over time, maintaining permanent resident status may become increasingly difficult.

The person’s own Social Security may still be payable in China.

Eligible spouses and survivors may also continue receiving benefits if they satisfy the applicable requirements.

But once the retiree becomes a nonresident alien for U.S. tax purposes, Social Security may become subject to the effective 25.5% withholding.

That naturally raises another question:

What if the person becomes a U.S. citizen before retiring to China?

A U.S. citizen does not lose citizenship simply by living in China for many years. Nor does living overseas turn a U.S. citizen into a nonresident alien subject to the NRA withholding rule discussed in this article.

For these purposes, SSA treats U.S. citizens as U.S. persons, so the 25.5% NRA withholding does not apply merely because they live abroad.

At first glance, that seems to solve the problem.

But it creates another set of considerations.

U.S. citizens generally remain subject to the U.S. system of taxation and reporting based on worldwide income even while living abroad.

And for someone who was originally a Chinese citizen, becoming a U.S. citizen changes something even more fundamental:

the person’s legal status when returning to live in China.

So it would be a mistake to conclude:

“Social Security will avoid the 25.5% withholding, therefore everyone should become a U.S. citizen before retirement.”

The real comparison is between two complete retirement arrangements:

Remain a Chinese citizen, eventually give up U.S. permanent residence, and retire in China as a Chinese resident;

or

Become a U.S. citizen first, then live in China long term as an American citizen.

Social Security is only one part of that decision.

Taxes, long-term residence rights, healthcare, assets, and the stability of one’s legal status later in life can all change as well.

That is the question for the next article:

Should You Become a U.S. Citizen Before Retiring in China?

Only then can we put the green card, Social Security, spousal and survivor benefits, the 25.5% withholding, and citizenship choice side by side and compare the two paths as complete retirement plans.

About This Series | Before Retiring in China, There Are Some Numbers to Work Out

For many first-generation immigrants from China who have lived in the United States for years, returning to China for long-term retirement can seem like a natural choice. But putting that plan into practice raises interconnected questions: whether a green card can be maintained, whether Social Security can continue to be paid abroad, how spousal and survivor benefits work, how tax status may change, and whether becoming a U.S. citizen before retirement makes sense.

This series does not attempt to decide whether it is “better” to retire in China or the United States. Instead, it takes a practical approach to issues that are often confused with one another. Cross-border retirement requires planning not only where to live, but also how immigration status, retirement income, taxes, and healthcare will continue to work together over the long term.

By Voice in Between