Is a UK DWP spousal bereavement benefit taxable in the US?

[Kimbeach]

My husband was a dual UK-US citizen and was receiving the UK state pension and other private UK pensions.  I have never lived in the UK; I am a USA citizen, residing in the USA.  Upon his death, I received a one-time bereavement payment and twelve months of small monthly payments.  These payments do not appear to be taxable in the UK.  I claimed them on my 2021 tax return but now am having to amend my 2021 return and am wondering whether I can remove this from my amended return?  The tax treaty and related documents are complicated and confusing, but a general principle seems to be that if a payment is not taxable in one state, it should not be in the other.  Can anyone advise on this?

[LindaS5247]

If you are amending your 2021 tax return for a different reason, I would not change anything except what you are amending it for. 

Unless you feel that you were taxed on this income, and should not have been.

In general. the pension will have to be reported on the US tax return, but the tax treaties can make it complicated. Because in addition to adding it on your 1040 you might have to file form 8833 along with FBAR and FATCA depending on your exact situation. You may want to consult with a Retirement Specialist regarding this.

If it truly is not taxable in the UK, it may not be taxable in the US.  It depends on which it falls under.

Regarding UK bereavement benefits:

Tax-free and taxable state benefits

State benefits that are taxable

The most common benefits that you pay Income Tax on are:

• Bereavement Allowance (previously Widow’s pension)
• Carer’s Allowance
• contribution-based Employment and Support Allowance (ESA)
• Incapacity Benefit (from the 29th week you get it)
• Jobseeker’s Allowance (JSA)
• pensions paid by the Industrial Death Benefit scheme
• the State Pension
• Widowed Parent’s Allowance

Tax-free state benefits

The most common state benefits you do not have to pay Income Tax on are:

• Attendance Allowance
• Bereavement support payment
• Child Benefit (income-based - use the Child Benefit tax calculator to see if you’ll have to pay tax)
• Child Tax Credit
• Disability Living Allowance (DLA)
• free TV licence for over-75s
• Guardian’s Allowance
• Housing Benefit
• Income Support - though you may have to pay tax on Income Support if you’re involved in a strike
• income-related Employment and Support Allowance (ESA)
• Industrial Injuries Benefit
• lump-sum bereavement payments
• Maternity Allowance
• Pension Credit
• Personal Independence Payment (PIP)
• Severe Disablement Allowance
• Universal Credit
• War Widow’s Pension
• Winter Fuel Payments and Christmas Bonus
• Working Tax Credit

If you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits. Please refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for additional information. 

To enter foreign pension in TurboTax online program, you will need to create a substitute form 1099-R. 

Here are the steps:

1.  Sign into your account and select Take me to my return

2.  At the right upper corner, type in 1099r, then Enter

3.  Select Jump to 1099r

4.  On screen, Your 1099-R, answer Yes and select Continue

5.  Next screen, Choose your bank or brokerage, select I'll type it in myself

6.  On the screen Tell Us Which 1099-R You Have, check the box 

     I need to prepare a substitute 1099-R and follow the prompts.  See attached screenshot

To enter a foreign tax credit on form 1116, go to:

1. After sign into your account, select Take me to my return

2.  At the right upper corner, in the search box , type in foreign tax credit and Enter 

3.  Select Jump to foreign tax credit 

4.  Start with screen Foreign Taxes and select Continue  to follow prompts.

If this does not help please feel free to come back to TurboTax Community with additional details or questions or click here for information on Turbo Tax Support.  You can connect with a Live TurboTax Agent and share your screen.

 

[Kimbeach]

Thank you for that information.  The payment is clearly a Bereavement support payment and under UK system, not subject to taxes.  The pension related approach is not really applicable in this situation, nor is the foreign earned income, as this situation is neither.  The UK did not withhold any taxes (per the non taxable regime) so there are no foreign taxes to claim.  In the sense that I originally claimed this income and now have overpaid my US taxes, I believe I would be entitled to a refund, providing I can rely on the tax treaty principle of a payment that is not taxed in one state is not subject to tax in another state.  Is this a reasonable position?

[Kimbeach]

and just to clarify further, amend my 2021 US tax return accordingly.

[DaveF1006 · Accepted solution]

I looked through the UK/US tax treaty and there is not a section that mentions bereavement benefits directly.  It is considered a death benefit and is not taxable in the UK. Death benefits are not taxable in the US as well unless funds are kept in a interest bearing account and the interest received is taxable.  You should receive some documentation that mentions if there is interest or not and if you didn't receive notification, assume that this benefit is non-taxable.

in the US, there is a social security death benefit that are paid to spouses and this is not considered taxable income.  The same principle will apply to the UK Bereavement support payment. 

[Kimbeach]

Thanks so much!  In amending my 2021 taxes, do you think it would be necessary to include Form 8833, or should an explanation suffice?

[ShirlynW]

Yes. UK DWP spousal bereavement benefits are taxable in the United State. Correct, state returns requirements differ. I advise you to check your state requirements. Also, you might have to file Form 8833 along with other financial reports like FBAR.

Sorry for your loss.

@Kimbeach