I want to present here How I interpret the taxation of my Romanian public pension; currently I am a US resident/citizen, and I have a small Romanian public pension.
My Romanian public pension is not taxed in Romania because it is below the level of taxation there.
As far as taxation in the US, there is an "Income Tax Treaty between US & Romania", which I presume is similar to the one between the US and UK (but I may be wrong).
The "saving clause" of this treaty is Article 4, General Rules of Taxation, and it says:
"(3)Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State
may tax its citizens or residents (as determined under Article 3 (Fiscal Residence)) as if this Convention
had not come into effect.
Paragraph (4) The provisions of paragraph (3) shall not affect: (a) The benefits conferred by a Contracting State under Articles 17 (Social Security Payments)..."
Article 17 of this treaty stipulates:
“Social security payments and other public pensions paid by one of the Contracting States (romania in my case) to an individual who is a resident of the other Contracting State (USA in my case) shall be exempt from tax in both Contracting States.”
Therefore, according to this treaty, I do NOT have to pay a US income tax on my Romanian public pension.
Now on another issue, reporting to the IRS: according to the IRS, if you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is or might be reduced, you must attach a fully completed Form 8833 to your tax return. However, based on the Instructions to Form 8833:
“Exceptions from reporting, Positions for which reporting is waived include, but are not limited to, the following. That a treaty reduces or modifies the taxation of income derived by an individual from ..., social security, and other public pensions, ...;”
As a result, I don't have to report my pension to the IRS on form 8833.
Discussion: I am entitled to US SS benefits, although I did not claim them yet; when I do, I expect to be subjected to the Windfall Elimination Provision (WEP), that is if WEP is not going to be annulled by the US Congress. WEP would reduce my US SS benefits based on my Romanian public pension with up to 50% of the later. I think this is how my Romanian public pension is "taxed" in the US. However, if WEP is going to be annulled by Congress, well, I guess I'll get a free lunch!
