Distribution of a foreign Employee Capital Plan

[Djritxist]

Hello,

We have a question regarding how to report in the US tax return the distribution of funds in an Employee Capital Plan in Poland (PPK). This plan is a long-term savings scheme (so not a pension plan) in which the employee's contributions are matched by the employer. The employee contributions are done post tax on a monthly basis, so there is no tax deferral/savings. Likewise, the employer's contributions are considered part of taxable income in Poland (taxable income = salary + employer's contributions), so we paid taxes on these match contributions on the year they occurred. This differs to the traditional 401k plans in the US, where you only pay taxes when you withdraw the funds.

In 2024, we withdrew all the funds in the PPK, and the only tax we paid in Poland is a capital gains tax for the increase in value due to the fund's investment returns, but we did NOT pay taxes for the balance withdrawn.

In the US tax return, I believe this distribution should not be reported as gross income (in the pension plan section), as this would require us to pay taxes on the entire balance again, when taxes had already been paid in previous years in Poland (we were not US residents in those years). My view is that in the US tax return we should only report as income the capital gain mentioned above, and then take a credit against the tax paid in Poland.

It would be very helpful if an expert could confirm that my approach is reasonable from a tax perspective. Thank you so much!

[pk · Accepted solution]

@Djritxist  In my opinion and  finding no direct reference to PPK in the US-Poland Tax  of 2013  ( even though there is reference to pension/annuity etc. ) and because this a voluntary participation " savings scheme ",  one way to do this would be to  generate a  dummy 1099-R  i.e. treat it  like an annuity  ( with no 1099-R issued and no EIN for the administrator).  Use  Box -1  -- gross distribution;  Box 2a -- the  gain   as the taxable amount ( just as in Poland );  Box 2b checked  ( Total distribution ), Box 7  use code 7 (Normal Distribution).

This should then allow IRS to tax you on the gain .

Thereafter  claim Foreign Tax credit  by using form 1116 -- Gross Foreign Income  is the Taxable amount; Foreign Tax is what you paid to Poland.

Does this make sense ?

[Djritxist]

Thank you. This is very helpful and indeed a possible path.

However, given that this is not a pension plan or annuity per se - but rather a long-term savings plan - my initial concerns with creating a dummy 1099-R were: 1) Since this is not a rollover plan, it may raise questions as to why the distribution is not taxable (though we do have the support and documentation in Polish language), and 2) reporting the gross amount may be misleading, given that 30% of the distribution was transferred to the public "Social Insurance Institution" (early withdrawal penalty), and another percentage was transferred to the "public labor fund" for the same reason. So, the actual net distribution is significantly lower than the "gross" shown in the Polish PPK statement (not sure which should be reported given these nuances).

Based on the above, I was wondering if - as an alternative to reporting this gain as "annuities" - it would be appropriate from a tax perspective to report the capital gains as either "other earned income" (line 1h in 1040) or as "capital gain" (line 7), effectively treating the capital gain as we would do with a mutual fund. I recognize there is no clear guidelines here, so appreciate any further insights here.

Thank you! 

[pk]

@Djritxist ,  thank you for your response.

1. The reason  I suggested the 1099-R path  because   (a) it allows you to recognize the whole amount of distribution -- Box 1  ;(b) it allows you to declare the taxable portion    Box 2a  ( obviously you have to be able to show, if challenged ,  that  you have paid taxes  for the  corpus of the distribution while earning in Poland ) ; and   (c)  the taxable amount is the same as the taxable capital gain per  Polish  Tax authority -- thus opening the possibility for foreign tax credit.  It is a traceable path showing the whole transaction.  Any other way, you  cannot show a clear path of the amounts involved.

Of course that is my opinion and your return is yours and under jurat of perjury.  It is your choice and only you can defend your path.

Is there more I can do for you ?

pk

[Djritxist]

Thank you for the response. I see the logic in your approach. I'm not a tax expert, so of course I want to take the most supportable approach from a tax perspective.

Thanks again for the guidance. No further questions on this topic.

Regards!

[pk]

@Djritxist , one favor.  If you are satisfied   that  this thread has now answered your query, please consider accepting -- I think this will  close the thread.  

If not satisfied, then please tell me what more I can do for you on this query .

[Djritxist]

Sure. I will mark your response as best answer, as I understand this is what you mean by "accepting".

I agree with your recommendation. Ultimately, the 3 approaches (1099-R, other earned income, capital gain) have identical impact, so there is no benefit in choosing a particular approach. Nevertheless, I like your suggestion as I agree it is the most transparent one.

Thanks again!