Tax treaty: Pension income and taxes on foreign pension

[juham2013]

I have been pulling my hair out over how to report income from a foreign pension and taxes paid on same, to avoid double taxation on the same income.  I am a dual citizen, living in the U.S.  Most likely, I have also caused plenty of confusion as well,  but I am at my wits' end right now.

Several methods have been suggested,  but they don't seem to either work or, from my perspective aren't even something that makes sense or are downright questionable.  For instance, using a "dummy 1099,"  which calls for dreaming up information when no 1099R Form is available.  Or, claiming a FTC on Form 1116 when reporting the foreign income under "Miscellaneous" for instance.  FTC can be claimed only when said income is reported under "Foreign income," I think.

Now, below, see an excerpt from a Tax treaty between the U.S. and my country of birth.  This document can be found on the IRS website.

a) pensions and other similar remuneration derived and beneficially owned by a resident
of a Contracting State in consideration of past employment shall be taxable only in that State;
and
b) pensions and other payments under the social security legislation of a Contracting
State and, where that Contracting State is the United States, other public pensions, paid to a
resident of the other Contracting State or a citizen of the United States shall be taxable only in
the first-mentioned State.

Then, there is the Form 8833, which TT does not support, incidentally (see link to it below):

https://www.irs.gov/pub/irs-pdf/f8833.pdf

On page 3 of the above document it states:

Positions for which reporting is waived  include, but are not limited to, the following. See Regulations section
301.6114-1(c) for other waivers from reporting.
• That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal
services, pensions, annuities, social security, and other public pensions, as well as income derived by artists,
athletes, students, trainees, or teachers;
• That a Social Security Totalization Agreement or Diplomatic or Consular Agreement reduces or modifies the
income of a taxpayer;

Summa summarum, in Conclusion; if what is written above is true and legally valid then, doesn't that suggest that:

1. I am not under any legal obligation to even report said income from a foreign pension (as per what is written on page 3 of IRS Form 8833)

2. Income and paid taxes from my country of birth can be considered excluded from the IRS tax code and both the income and taxes are solely under the jurisdiction of my country of birth

Looking at "2." above does me make ponder though that I should still report the pension under Foreign Earned Income Exclusion (FEIE) to the IRS as it is considered part of income from sources worldwide and needs to be reported (this would seem to contradict what Form 8833 states).  BUT, how do I do just that?   I tried already and it doesn't seem to work, OR, if it does, I get hit by additional Federal taxes.   Given that my pension is heavily taxed in my country of birth, it would seem that I get penalized by said income!

Would some help me save my sanity?!

JJ

[SusanY1]

The Form 8833 (which you correctly note is not supported by TurboTax), page 3, is referring to the waiver of the requirement to use form 8833 to report the treaty position and is not a waiver of the requirement to report the income on your tax return.  You will need to report the income, and the taxes paid on it, to get a credit for the taxes paid to your country of birth.

Since I don't know which country's treaty you're reviewing, it's a bit difficult to say with certainty from excerpts alone, but it sounds as if you aren't required to use Form 8833 in order to claim credits for foreign taxes paid.   

To claim the credit in TurboTax, you have to enter the income in two places. 

First, enter it either in the entry area for Form 1099-R or Miscellaneous income.  The Miscellaneous income area is a bit easier when you plan to electronically file your return, but has some limitations particularly if you file a return in a state that may reduce the taxes paid specifically on pension income. 

Next, enter the income in the area for Foreign Tax Credits.  The income reported in this area doesn't go on Form 1040 as income, but is used only on the Form 1116 to aid in determining your tax credit.  Only the first entry (1099-R or Miscellaneous income) will report the income on your Form 1040. 

If you're not required to file Form 8333 (because of the waiver), then reporting the income and the subsequent tax paid for the credit will take care of your reporting requirements.



 

[juham2013]

Dear SusanY1,

I value your time very much.   What you are writing makes a lot of sense. Note, I live in Texas so there are no State income tax implications!

So, if I do exactly as you write I will be able to correctly file my tax returns, right?  I have plugged in all other information and data.  The only snag is how to report the foreign pension income and also the paid foreign taxes to get a tax credit rather than the penalty that saw before.

Cheers,

JJ

[jtax]

There is one subtle thing going on that is easy to miss.

What it means (if your treaty is typical) means that you must report the income, but you may get a foreign tax credit to offset the US tax on the foreign income -- but only the US tax and only in the proportion of the foreign income / worldwide income.

You point you the treaty language stating that only the foreign country can take your foreign social security. Great. But often there is a so called "savings clause" hidden elsewhere in the treaty that says the US can also tax everything because of citizenship (not residency). 

Often the US agrees to give the a tax credit for such taxation based solely on citizenship. That is the FTC.

So what the treaty provisions are really doing is overriding the US tax code foreign/domestic source rules. Those rules determine what income is treated as coming "from sources with the US." The FTC only applies to income "from without the US" so getting the foreign income to be foreign source is essential to getting the FTC.  Sometimes the treaty rules agree with the US code rules, sometimes not. Disclosure is required if they override the code rules and an exception does not apply (you properly cited the complex exception regulations).

For the US source rules see IRC 861 et. seq. and the regulations. https://www.law.cornell.edu/uscode/text/26/861

For an example of the saving clause see the US Spain tax treaty. https://www.irs.gov/pub/irs-trty/spain.pdf (emphasis added)

Art 1(3): 3. Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may
tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its
citizens, as if the Convention had not come into effect.

Art 24(2): In accordance with the provisions and subject to the limitations of the law of the United States (as
it may be amended from time to time without changing the general principle thereof), the United States
shall allow to a resident or citizen of the United States as a credit against the United States tax on
income
(a) the income tax paid to Spain by or on behalf of such citizen or resident; a