Hello,
We have a question regarding how to report in the US tax return the distribution of funds in an Employee Capital Plan in Poland (PPK). This plan is a long-term savings scheme (so not a pension plan) in which the employee's contributions are matched by the employer. The employee contributions are done post tax on a monthly basis, so there is no tax deferral/savings. Likewise, the employer's contributions are considered part of taxable income in Poland (taxable income = salary + employer's contributions), so we paid taxes on these match contributions on the year they occurred. This differs to the traditional 401k plans in the US, where you only pay taxes when you withdraw the funds.
In 2024, we withdrew all the funds in the PPK, and the only tax we paid in Poland is a capital gains tax for the increase in value due to the fund's investment returns, but we did NOT pay taxes for the balance withdrawn.
In the US tax return, I believe this distribution should not be reported as gross income (in the pension plan section), as this would require us to pay taxes on the entire balance again, when taxes had already been paid in previous years in Poland (we were not US residents in those years). My view is that in the US tax return we should only report as income the capital gain mentioned above, and then take a credit against the tax paid in Poland.
It would be very helpful if an expert could confirm that my approach is reasonable from a tax perspective. Thank you so much!
