I receive social security benefits from both the US and Italy, and I would like to share something that is not obvious, and that can improve one's tax liability.
The monthly payments received from the other country (in my case Italy) depending on the treaty, can be regarded as social security and receive a more favorable treatment. In the past I had entered the amount I received from my Italian social security as if it were a pension item even though I do not receive a 1099-R; because of that, TurboTax made me fill out form 4852, using payer number 99-0999999 as somebody suggested in this forum.
However, the more I thought about this, treating my Italian social security, as something different from the US Social Security, the more it seemed incorrect. I pored over tax treaty between Italy and the US, both in English and in Italian, and became convinced that the amount received from Italy has to be treated exactly as social security, which offers some breaks both at the federal and at the state level.*
To do this in TT, in the section where I enter Social Security benefits from form SSA-1099, I entered in box 5 the sum of both box 5 from the US, and of my Italian social security. Then I entered the Medicare premium deducted from my benefits.
Note:
* -
From IRS Pub.915
Introduction page 2
This publication also doesn’t cover the tax rules for foreign social security benefits. These benefits are taxable as annuities, unless they are exempt from U.S. tax or treated as a U.S. social security benefit under a tax treaty.
This publication 915 clearly states the case that there are instances in which according to tax treaties those foreign benefits could be treated as a US social security benefit.
All tax treaties can be browsed starting from this page. In my specific case, I then can access
US-Italy Tax Treaty (html)
https://home.treasury.gov/system/files/131/Treaty-Italy-8-24-1999.pdf
Article 18, para.2 -
- Payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in the other State.
Although the above wording doesn't say anything in addition, it keeps making the case that social security of Italy and of the US are the same type of item from a taxation point of view. There is also an additional document that goes into technical explanation of the various paragraphs and what they mean.
Technical explanation
ARTICLE 3 (GENERAL DEFINITIONS)
Paragraph 2 provides that in the application of the Convention, any term used but not defined in the Convention will have the meaning that it has under the law of the Contracting State whose tax is being applied, unless the context requires otherwise.
paragraph 2 of Article 1 of the Protocol provides that the saving clause does not override the exemption from tax of social security benefits provided in paragraph 2 of Article 18 of the Convention for individuals who are citizens of the residence State even if they are citizens of both States
payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State will be taxable only in the other Contracting State. This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or Government employees.
This language reinforces my interpretation that the Italian social security since it is referred to as social security in the treaty, it should have the same meaning and should be treated as the US Social Security. All of the above sentences treat social security from the other country as if it were social security in the country that taxes it. This may be one area that is overlooked by taxation professional, but I feel that my interpretation is fair.
I hope this helps.
