My husband is a dual-status alien that we're treating as a US resident for the entire year, per Publication 519 (Choosing Resident Alien Status). We are filing a joint return for the year 2024. The only income my husband received was Universal Credit (unemployment) payments from the UK's Department for Work and Pensions (DWP). Each payment has a total entitlement, which consists of:
- Standard allowance (deposited to his foreign bank account)
- Side note: this is his only foreign bank account, and it never met the thresholds for FBAR/8938 reporting - not a concern here
- Limited capability for work and work-related activity (deposited to his foreign bank account)
- Housing (not deposited to him - paid to landlord directly)
According to UK.gov, the UK considers Universal Credit to be a tax-free benefit. However, I'm not sure whether to include these payments as taxable income on our US return, and whether to report the total entitlements, or only the portions he received directly to his bank account.
I figure these payments don't apply to the foreign earned income credit, since they don't fall under payment for professional services, and Publication 54 calls out social security benefits as unearned income.
This seems to be the most relevant section out of the UK/US tax treaty (article 17 paragraph 3), which leans towards "yes" but I may have missed something in the legalese:
3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a
Contracting State under the provisions of the social security or similar legislation of that State
to a resident of the other Contracting State shall be taxable only in that other State.
Do these Universal Credit payments need to be included as worldwide taxable income on our US joint return? If so, would the housing portion also be included? How would they best be entered on TurboTax as income? 1099-G seemed appropriate, but only for US-based unemployment.
