Tax free foreign pension

[Mizio]

I have a couple of small foreign pensions for which no local income taxes are due because they are below a taxable limit.

I would imagine that I have to report them into my US tax return, but will they be taxable in the US?

That would be unfair if they do!

[MarilynG1 · Accepted solution]

Yes, as a US citizen all your world-wide income is reported.  For most folks receiving a Foreign Pension, they take a Foreign Tax Credit which offsets the US tax they are assessed on the income.

It may be that your small pensions won't affect your tax situation much, after the Standard/Itemized Deduction is applied.

To report Foreign Pension Income:

• Under Wages & Income, scroll all the way down to Other Miscellaneous Income, 1099-A..
• On the next screen, scroll all the way down to Other Reportable Income, Other Taxable Income
• Enter a Description and Amount

@Mizio

[Mizio]

Thanks very much for your response. Very helpful.

On the same subject, as per Court order, I will have to split some of these foreign pensions with my ex-wife.

Can I claim these payments under 'Alimony' as a tax credit?

Kind regards

[purplelisa13]

There are some foreign pensions that are not taxed under rules preventing double taxation.  I used to be able to enter the pension under Retirement income and set the taxable amount to 0, per the verbiage in the treaty. Previously I could use all 9's or all 1's for the TIN, but that is not working this year. Using Other Misc Income makes the whole amount taxable, which is not the correct treatment. I am concerned that I will either have to start using a program other than TurboTax or file manually unless there is some way to work around this.

[DaveF1006]

If you are certain you are covered by the treaty, you can negate the income in the same section where you reported it.

1. Log into your account
2. Select Wages and income>other income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Now give your income the following description.  Income excluded by US/XXX tax treaty. The X's represent the country that the US has a tax treaty with. Then report the same income with a minus sign in front of the amount. 
7. This entry should be preceded by the original entry you made that reported the income so that there is a flow between the two entries.

Just one last note, some states do not honor a foreign tax treaty provision.  Please read this IRS link

to find out if your state honor these treaties.

@purplelisa13 

[Edited 02/13/24|2:15 PM PST]

[Mizio]

Thank you very much for providing this tip.

I was not aware of this and all I was doing was to report it as an income but then take the credit for the foreign taxes paid by filling up the 1116 form.

IRS didn't raise issues with this approach with my most current tax filings.

I will try this method this year, obviously without taking the credit for the foreign taxes paid!

Would this method also be applicable to income coming from rent abroad where I also pay foreign income taxes?

Thanks a lot.

[DaveF1006 · Accepted solution]

Yes, you can do this for foreign rental income as well as long as long it isn't listed as an exception in the treaty. Some treaties do list the types of income that is exempted so make sure in your country's treaty that there is no exception for rental income.

As an FYI,  make certain that you do not try to claim a foreign tax credit for this income you exempted. I think you know this but I thought I would mention it anyway.

[Mizio]

Thanks a lot!

Do I still need to enter the foreign rental income under 'Rental Properties and Royalties?

It shows an overall negative income there due to expenses/depreciation and others so I would imagine the rental income is not included as US taxable income.

Cheers

[AbrahamT · Accepted solution]

That is correct.

It would "NOT"be included in your "taxable" income for U.S. purposes, however, you would still need to

report it on your Sch E with the amount of rent received and deductions. 

All rental foreign income whether positive or negative must be reported to the IRS.

[purplelisa13]

This thread has wandered off topic. Pensions are not treated the same as a rental property. 

[Mizio]

Hi, 

going back to this topic.

The tip that you have suggested seems to have worked fine for the last couple of my federal tax returns (meaning that they are not being taxed in the US, while they are taxed abroad), which I will follow again this year.

As I am working on my 2024 return, I have a question on how these foreign pensions will be reported in my state tax return.

Under 'Other non-wage income', the foreign pension automatically shows up with the + $$ amount taken straight form the federal return.

Apparently, I cannot remove it from my state return as it keeps coming back showing as income and being therefore taxable as a state income.

Is there a similar way to remove this income from the state return as well?

Thanks very much

Maurizio 

[MarilynG1]

What state are you in?  If you entered your Foreign Income in your Federal return, and claimed a Foreign Tax Credit for tax paid on that income in a foreign country, your state interview should have questions for you to adjust income and credits transferred from your federal return.

If you can provide more details, we'll try to help.

@Mizio 

[Mizio]

Thank you for your quick response. The State in question is New Jersey.

The issue is that I am not claiming foreign tax credit because I am following the advice received by you of reporting the income from foreign pension under 'Other Miscellaneous Income' and at the same time excluding the same amount with a negative figure under the US International treaty to avoid double taxation. The foreign pension is therefore not taxed in the US.

Interestingly, the foreign IRS has not yet charged me with the local taxes on the pension received back in 2023!

Another reason I cannot claim a tax credit because I have not paid foreign taxes yet...

Look forward to your suggestion.

Thanks

[Mizio]

I might have found a solution.

As I cannot manually remove the income from my foreign pension as NJ Income (it is automatically populated with what is included as Federal income and pops back if I try to remove it as a state income), I have added an extra line as a negative income for that amount (as I have done for the federal return), et voila' that amount now doesn't show in my stare income summary!

Please confirm that this is the best way to handle this issue

Thanks

[DaveF1006]

It depends. How did you report it as negative income? If you have excluded this in the federal return, that is not correct. If you strictly adjusted this in your state return, then this is correct.

Please verify and make sure your federal income reflects the foreign pension income while your NJ return does not. I only caution your approach because you said " I have added an extra line as a negative income for that amount (as I have done for the federal)" thus this suggests you may have reported this negative income in the federal return and this negative entry populated in your state return.