topic UK Goverment Pension and Private Pension - Tax free in US or not? in Retirement tax questions

UK Goverment Pension and Private Pension - Tax free in US or not?

britgeezer — Mon, 03 Feb 2020 16:17:12 GMT

I’m confused by the varying information being posted about the the US tax liability of the payment of UK government Pensions paid to US Residents / Citizens. Different people seem to read article 17 and deduce different answers, so perhaps we can ask for the answer from those that have successfully filed.

If I may I would like to address the following situation:

Full time residents / citizens receiving SS for both partners.
UK government paid to both partners based on working contributions prior to moving to the US.
Previous UK employer pension paid to 1 person
US tax Basis, married filing jointly.
UK basis no tax deducted from any pension.
UK pension amounts declared to SS.

Depending on which opinion you read, article 17 is designed to avoid being taxed twice (UK+US) but I suspect most people interested in Article 17 pay no UK tax because of the amounts being below any UK tax threshold and or non-residency.

So, the questions are:

Is a UK government pension not taxed in the UK subject to US tax liability or excluded under article 17?
Does the same answer apply to private UK pensions (contributions from employee and employer?
How is the pension correctly reported in Turbo Tax?

Where can you download a copy of article 17?

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

Irene2805 — Mon, 03 Feb 2020 17:24:02 GMT

To answer questions 1 and 2, the UK pension is subject to tax in the UK and not the US. This applies even though it may not be actually taxed in the UK because of any pensions exclusions there.

Article 18 of the UNITED STATES-UNITED KINGDOM INCOME TAX CONVENTION states: "...any pension in consideration of past employment and an annuity paid to an individual who is resident of a Contracting State shall be taxed only in that State [the UK].."

For question #3, to report the pension in TurboTax, report the full amount of the pension under the Social Security income section and then report the same amount (as a negative amount) as other income on line 21 of your 1040. You will also need to attach a form 8843 (which is not supported by TurboTax) to a file by mail copy of your return.

Please follow these steps:

On the Wages & Income screen, scroll down to Retirement Plans and Social Security.
Click the Start/Revisit box next to Social Security (SSA-1099, RRB-1099)
Click the Yes box on the screen, Did you receive Social Security or Railroad Retirement benefits in 2019?
On the Tell us about the benefits you received screen, enter the amount of your foreign pension in Box 5.
Back on the Wages & Income screen, scroll to Less Common Income.
Click the Start/Revisit box next to Miscellaneous Income, 1099-A, 1099-C
On the next screen, click the Start/Revisit box next to Other reportable income.
Click the Yes box on the Any Other Taxable Income screen.
On the next screen, enter the amount of your pension as a negative number. For Description enter “UK pension offset” (or something similar).

The negative number will appear on line 21 of your return and will negate the entry for your UK pension.

To exclude your UK pension from taxable income, you will have to include Form 8833 - Treaty-Based Return Position Disclosure. Unfortunately this form is not available in TurboTax. Download the form from the IRS website, complete it, and include it with your return. [You will have to mail in your return.]

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

britgeezer — Mon, 03 Feb 2020 17:30:52 GMT

Thank you for the concise answer.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

SWANDR — Tue, 04 Feb 2020 01:12:56 GMT

Should I enter the full amount of the UK pension reported as social security receipts, or only the (lesser) amount that actually flows througth to taxable SS income reported as part of AGI. In other words, should the net effect be zero impact on taxable income?

I don't undertand the comment about line 21. When I enter the negative number as “miscelleneous income” in Turbo Tax it appears on line 7a on Form 1040.

Thanks for your help!!

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

DianeC958 — Fri, 07 Feb 2020 20:03:50 GMT

When reporting your income for US tax purposes you are required to report worldwide income, not just taxable income amounts.

You report the foreign pension income similar to the way you would report it if the income came from the US by using substitute 1099-R forms

Link to The Taxation of Foreign Pension and Annuity Distributions.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

rdgcarter — Sun, 12 Apr 2020 07:14:09 GMT

Good reply!

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

Riverview1303 — Thu, 18 Jun 2020 17:03:46 GMT

On the Instructions for Form 8833 section Exemptions from reporting does it not say the reporting on form 8833 is waived for pensions, annuities, social security, etc? So must I file form 8833 for my UK social security and UK pension if I am an American resident in the UK?

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

britgeezer — Sat, 23 Jan 2021 00:02:43 GMT

Is there any change to the Plus / Minus instruction from last year.. TT doesn't seem to handle it the same way.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

LinaJ2020 — Sat, 23 Jan 2021 02:02:46 GMT

If you believe your UK pension is exempt, you should file the Form 8833.

Per instructions of Form 8833, page 3, the third column, it says:

"Positions for which reporting is waived include, but are not limited to the following.

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;"

See image

@Riverview1303

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

LinaJ2020 — Sat, 23 Jan 2021 02:04:52 GMT

Tax treaty-related matters are out of scope for our advice. Generally, the UK pension is taxable to the US. You would not file the Form 8833 Treaty-Based Return Position Disclosure However, some foreign pension might not be taxable if it is covered under any tax treaties between the foreign country and the United States. As it is out of our scope for advice, you are advised to consult a specialized professional for verification.

If the UK pension is not taxable to you,

report your full amount as instructed below in the 1099R section. Then enter the treaty exempt amount as negative amount (e.g. -5000) under Other Reportable Income as instructed below.

Download and fill in a Form 8833 from IRS to claim an exception. https://www.irs.gov/pub/irs-pdf/f8833.pdf

You cannot e-file. You may still use the TurboTax program to prepare all your tax forms, but you would need to print them out and submit by mail along with form 8833.

If it is taxable, to enter the UK pension, you will need to create a substitute form 1099-R.

Here are the steps:

In TurboTax online,

Sign in to your account and select Pick up where you left off
At the right upper corner, type in 1099r, then Enter
Select Jump to 1099r
Follow prompts
Next screen, Choose your bank or brokerage, select I'll type it in myself

Follow prompts. On the screen Tell us if any of these uncommon situations apply

Check the box I need to prepare a substitute 1099-R and follow the prompts.

As to the Federal ID, UK pensions often do not have the ID number. Please try entering nine 9s. If electronic errors occur due to 1099-R data entry, enter the pension under Miscellaneous income, see instructions below. As long as the IRS has the pension reported and included in total income, it is not problematic.

To your left, select Federal
From the top, select Wages and Income
Scroll down to last section -Less Common Income -select Miscellaneous Income, 1099-A, 1099-C- Start
Next screen, scroll down to Other Reportable Income- Start
Follow prompts

For more information, see http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

john12140 — Sat, 06 Feb 2021 14:32:58 GMT

Thank you for those detailed instructions. I’m a dual US/UK citizen and US resident who now receives a UK State Pension from my years in UK. 2020 is my first year to file US taxes including a UK State Pension of less than $10,000. It's clear from IRS.GOV under Claiming Tax Treaty Benefits, point 5, that I don’t need to file Form 8833 since I’m under $10,000.

So my question is for “britgeezer” or anyone in the same position….

Is the UK State Pension really exempt under the US/UK Tax Treaty Article 17? and have you successfully filed using the Positive substitute 1099R and Negative miscellaneous income so well described by “LinaJ2020”

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

britgeezer — Sat, 06 Feb 2021 18:24:11 GMT

Hi john12140

Dual status you say, from the US perspective when you became a US citizen and domiciled here – the US may not agree, but the British Government would, bless them.

I had the same decision to make last year and I gave the “income in and out” information to a tax preparer whom used it, I have to look and see if they filed an 8833. This year when I asked here there were different opinions ….

Did you mean $10K I don’t see that - not item 5 but its $100k. The document you reference is full of “IF” comments, we need a definitive statement.

Unless you kept your pension income in the UK why would you report the official UK amount, did you get that? I use the direct deposit received $ amount that various each month.

Since it’s a big influence on my US taxes (my wife and I both receive UK Government pensions), I have contacted 2 Expat tax services to see what they say. I suggest you do the same and we compare notes.

Run the UK pension amount through TT, that’s the $ amount at risk if it’s not deductible.

I’m asking CrossBorder Wealth and Experts for Expats, may I suggest you consult with someone else and we share the results.

If you will or do receive Social Security, as we do; I would love to compare some notes off line.

John

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

john12140 — Sat, 06 Feb 2021 23:00:56 GMT

Thanks for that, on the Dual citizenship, my US passport even provides information for Dual citizens so it seems to be recognized now.

Yes, I’ll run TT without the negative amount to see what the impact is, I’m still waiting for some of the numbers. It won’t be much because I only got a few weeks UK State Pension in 2020. I’m not so concerned this time but I was hoping to establish how to proceed in future years. It would certainly cost me more to get professional advice than I would save for 2020.

On the $10K, see below from IRS.GOV:

John

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

MovedtoNZ — Tue, 23 Feb 2021 19:58:59 GMT

IRS webpage about claiming tax treaty benefits

Of importance is #2 in the below quote from the above website. Of importance, no forms are required to claim the tax treaty exemption on pension payments.

>>>

Exceptions

You do not have to file Form 8833 for any of the following situations:

You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate.
You claim a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants. ...

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

ReneeM7122 — Tue, 23 Feb 2021 21:03:29 GMT

Here is the UK - US tax treaty. Scroll through it until you reach article 17.

The US can tax the pension of a person who is a resident of the US unless the pension is exempt in the country of origin, since the person resides in the U.S. However if the pension is tax-exempt in the UK, it is also tax-exempt in the U.S.

And you are correct, no forms are required in this situation.

@MovedtoNZ

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

ER275 — Tue, 23 Feb 2021 23:49:20 GMT

I too am confused. Article 18 provides that the pensions or annuities will be taxed in the recipients Contracting nation state. Therefore in my case I have a company pension from the U.K. and my wife and I each receive a state pension, all of which is taxable in the U.S as we are resident in the U.S and citizens. The purpose of the treaty is to avoid double taxation, not any taxation! That would be nice! The pensions are not exempt from U.K. tax so they become subject to U.S. tax for a U.S. resident as I read it.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

MovedtoNZ — Wed, 24 Feb 2021 00:58:52 GMT

Agreed ER,

I think that the "best answer" in this thread is incorrect, although the DTA that I have knowledge of is the US/NZ DTA rather than the US/UK DTA. The DTA states that the country that you have residency in, has sole taxation rights to private pensions. I "think" that if I am reading the US/UK DTA correctly, it similar to the US/NZ DTA where the public pension is taxed in the country of origin (for example US social security payments gets taxed only by US despite one having residency in NZ). For the US/UK DTA, both articles 17 and 18 have applicability for you.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

DaveF1006 — Wed, 24 Feb 2021 01:06:44 GMT

if you paid a foreign tax on your British pension, you can claim a foreign tax credit on your US tax return to avoid double taxation. To claim your foreign tax credit, please follow the guidelines written by one of our agents LinaJ2020 as she has listed detailed instructions. Follow these closely.

After this is entered, you will need to claim a foreign tax credit by doing the following:

Click Federal >Deductions and Credits at the top of the screen
Scroll down to Estimates and Other Taxes Paid and click on Show More
Click on Start or Revisit next to Foreign Taxes and then select Yes
Select Yes to the question "Have you already reported all of your foreign income?" and then click on Continue
Select any applicable boxes to the question "Tell Us About Your Foreign Taxes" and then select Continue
Then select "Take a Credit" to the question "Do You Want the Deduction or the Credit?" Select No to the question "Do all of the following apply to your foreign income?"
Continue until you get to the section "Choose the Income Type" and then select the appropriate income category. Click Continue.
Add the country and continue through the sections, answering any applicable questions. Keep going until you get to the section "Foreign Taxes Paid" and then enter your foreign taxes and the date. (See screen shot below)

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

britgeezer — Wed, 24 Feb 2021 22:04:11 GMT

To understand the full situation and how bad it is for us retiring here, over and above article 17 &18 you also need to consider the IRS document "The agreement between the US and United Kingdom document" (Windfall Agreement) and its sister document "Windfall Elimination".

Having consulted with several experts here is what I understand. Assumption - you are a US resident or Citizen.

Income from UK Social Security from DWP and private pensions if not taxed in the UK, is taxable in the US as ordinary income.
Most experts say don't bother to create 1092-R's to report, just include it as other income. The net result is the same, just the paper work is less onerous. Now more bad news....
UK DWP and Private Pension is used to calculate a reduction in any eligible US SS payments. I'm not sure of the calculation and SS determine the exchange rate and will not tell you or vary it.
This additional income will increase MAGI and so probably also increase IRMAA for Part B and Part D premiums.
If the income is not declared and they find out they will claw back "over-payment" they made through SS.

So folks your UK DWP and Private Pensions are not only subject to US tax, but will reduce your SS payments and potentially increase Medicare Part B and D costs.

Anybody fancy going to a Tea party?

If any Tax Professional with experience in successful rebuttable of UK Pension taxation in the US would like to comment please do.

I would love to receive confirmation and save a bunch of money now I'm on fixed income.

Re: UK Goverment Pension and Private Pension - Tax free in US or not?

MovedtoNZ — Wed, 24 Feb 2021 22:37:58 GMT

There are some interesting details here...

One is the "is not taxed" proviso. One should not expect a free lunch. TANSTAAFL.

Another is the public pension and SS. I've not read through the details on the US/UK DTA sufficiently to confirm it is the same as the US/NZ DTA, although they use quite similar language and wording. For the US/NZ DTA, the result is that you get the highest of the two as a payout, and not a cent more. If the UK public pension payout ends up being higher than the US SS payout, then, you would not get the US SS payout. If the UK public pension payout is lower than the US SS payout, then you can claim the difference between the two from SS.

Any private pension payout will not be used to reduce the US SS payout, regardless of whether the private pension is sourced in US, UK, or other countries.