While living overseas, my wife, who is a UK citizen, briefly received contributions from her UK-based employer for a pension up until a few weeks prior to our marriage. The year of our marriage, I filed a joint return with her status specified as a non-resident alien, but only counting income she earned from our marriage date through the end of that year. We have since relocated to US and she is now a US resident. In 2019, she took full distribution of that foreign employer pension. Would (a) this distribution, be US taxable given its from a pension related to services she performed while in no way connected to US, and if so, (b) would the full distribution amount be taxable given she didn't have to make any contributions herself, and (c) how would we file this given no 1099-R was generated by the foreign employer? I saw this IRS guidance but am not sure if this applies in anyway:
Foreign Contributions while a Nonresident Alien
Your contributions and your employer's contributions are not part of your Cost if the contribution was based on compensation for services performed outside the United States while you were a nonresident alien and not subject to income tax under the laws of the United States or any foreign country (but only if the contribution would have been taxable if paid as cash compensation when the services were performed).
Yes, since your wife is now a resident alien, all of her worldwide income is taxable. This includes income for the pension that was related to income not earned in the U.S. Since the services were performed while a nonresident alien, you are correct that any contributions of her own income would not be considered cost (making the basis zero and the entire distribution taxable).
However, there are some specific allowances in the Income Tax Treaty between the U.S. and the U.K. related to pension income that allow some of the income to follow the same rules in the United States as the income would follow in the U.S.
To take advantage of the provisions in the Tax Treaty, you would need to file Form 8833, which is not supported in the TurboTax program.
Thank you. So even though the foreign pension was accrued prior to our marriage, when she had no US taxable status, the fact that she is taking a distribution while having US status incurs a US tax liability? Given the distribution did not result in generation of a 1099-R, should I be filing a substitute 1099-R, and if so, what would I fill out in the Payer's Federal identification number given the foreign employer doesn't have one and the other fields for which there is no information other than the gross distribution?
Yes, if the distribution happened while she was a resident of the US. However, I would talk to someone with expertise on the US/UK treaty.
Yes, you can use the substitute 1099-R to report the distribution. You also can report the income as "other income." and then you do not need to enter a Payer's Federal Identification number.
To report it as other income.as "Foreign pension"
Open your return in TurboTax
Click on Wages & Income
Scroll down to All Income
Scroll down to Less Common Income
Scroll down to Miscellaneous Income, 1099-A, 1099-C
Click start
Scroll down to Other reportable income
Answer yes
Enter description and amount
Thank you. Would the alternative approach you suggested for reporting, which results in the distribution being reported on 1040, line 7a, be preferable over this other approach I've seen recommended on other TurboTax posts which lumps in the distribution into 1040, line 1?
Federal Taxes -> Wages & Income -> Less Common Income -> Foreign Earned Income and Exclusion
The impact to taxable income is the same, but I wonder if one way is more favorable over the another?
No. There wouldn't be any tax advantage to you, one way or another.