Tax free foreign pension

[Mizio]

Thank you for your reply.

To further clarify, I have added the foreign pension in the federal return and then added an extra line with the exact same amount but with a - sign beforehand. This is what it was suggested, and it worked fine as this way it shows zero balance and hence not computed as income.

In the state return only the 'positive' line item automatically populates straight from the federal return; only I did was to add a 'negative' line item for the same amount quoting the US treaty; as a result, the foreign pension doesn't show as income in my state tax return.

Basically, same approach for both the federal and the state returns.

Hope it clarifies.

[ThomasM125]

That would be correct, provided the income is not taxable on the federal and state return because of the treaty. Also, I'm surprised the negative entry to other income does not automatically populate on the state return. Before you file the state return you should look it over carefully to insure the treaty income adjustment isn't reflected twice on the state return.

[Mizio]

I have checked the Income Tax Treaty documents available at IRS website for the two countries of interest to me and it would appear that income from both pensions and property rental 'shall be taxable only in the first-mentioned Contracting State.'

So, I should be good to exclude this income from both federal and state returns using this +/- trick.

Thanks again!

[DaveF1006]

To clarify, what country?

[Mizio]

Belgium, and Italy

[DaveF1006]

Yes, this may be true but since the US requires you to report your worldwide income, you would need to report the foreign income from all sources and then claim a foreign tax credit so that you will not be double-taxed by both countries. This does not involve using the +/- feature that you have suggested.

[Mizio]

Worldwide income is reported in both the federal and the state returns.

The +/- option to avoid double taxation following the treaty was suggested here by someone at TurboTax and it made sense to me as one transparently reports the income, and still, it does not get double taxed.

As I mentioned, I have not paid taxes in Belgium yet for the pension received back in 2023 (apparently, they are very slow 😀) so I cannot claim paid foreign taxes back in my 2024 US tax return.

I used the +/- option last year for the federal return and it worked just fine, i.e. no queries from IRS.

The only new issue here is for state taxes, where I would be double-taxed unless I use the +/- option.

As a matter of fact, I now realized that my 2023 state return had this foreign income reported without using the +/- option (which I used instead for my federal return) and therefore I double-paid state taxes on this state income.

I am thinking of filing an amended 2023 state tax return to fix this issue.

I think that the treaty clearly says that taxation for foreign assets should occur at the country of origin in order to avoid double taxation.

The question is how to just do that. The +/- option seems to me to be an elegant, transparent and efficient way to achieve just that but I am open to your suggestions.

[DaveF1006]

No, you would be operating on a slippery slope if you exclude your worldwide income in the manner you prescribe. The US taxes their residents on worldwide income and if you pay taxes in the foreign country, then the US tax liability may be reduced by the amount of foreign taxes paid on that income. This prevents double taxation when you are taxed by both the US and the foreign country. This is called the Foreign Tax Credit.

I stand by my original advice and that is to report the income and take the foreign tax credit. i would not recommend excluding the income by +/-.  If you do report the income and exclusion in this manner, I wish you well but you do not have my blessing.

@Mizio 

[Mizio]

Now I am really confused

On 02/13/24, you suggested to use the +/- trick (see your note all the way up this thread). @DaveF1006 

What has changed since?

[Mizio]

I would appreciate a response, given that I followed your advice on this when I filed my tax return last year @DaveF1006 

[DaveF1006]

It depends. I don't think reporting your income then excluding it is wrong as long as it is permitted under the tax treaty.  i think the IRS is examining  foreign reporting reporting a little more closely than in the past thus I have adopted a more conservative approach in regards to foreign reporting to ensure compliance. 

@Mizio