Distribution code for foreign social security

[yunliangchen]

I receive foreign social security benefits monthly.  Using Form 4852 (Substitute for 1099-R) to enter the info, I'm stuck on the distribution code (8j).   None of the codes applies.  But TurboTax doens't let me move forward without making an entry.  What should I do?

[yunliangchen]

Thanks for the quick response.  I want to add two more details: (1) My foreign social security benefits are not taxable in the US due to a treaty.  (2) I believe this tax exempt foreign social security should be included in MAGI for purpose of ACA's premium tax credit (correct me if I'm wrong here).  Therefore, what should I do in Turbotax so that these benefits are not included in taxable income, but included in MAGI?

[GeoffreyG]

Hello yunliangchen:

Thank you for the additional information.

If your foreign Social Security benefits are non-taxable by treaty, then you can simply fill out Form 4852, include the full gross distribution amount (in US dollars) of the benefits received in Box 8a, but then in Box 8b you would enter $0.  Normally, a separate tax treaty benefit claim needs to be included with your tax return (by filing Form 8833) to take such a treaty-based tax position.  However, where the excluded foreign income is simply a result of pension or foreign social security, then Form 8833 is not required, per the IRS.  Please see the section titled "Exceptions" at the following IRS.gov webpage for confirmation of this fact:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/individuals/international-taxpayers/claiming-tax-treaty-benefits">https://www.ir...>

In short, this provides the taxpayer with a neat and easy way to "report" (or "disclose") foreign social security income without having to also file Form 8833 (which is not included in TurboTax).

The second part of your question is somewhat more problematic.  In order to accomplish this correctly, and change Modified Adjusted Gross Income for the ACA credit calculation, you would need to be working in a desktop version of TurboTax (not online).  Next, the user would open up the tax return with the desktop Forms Mode of the program.  Then the MAGI figure would be manually overridden in the Form 8962 (a.k.a. Affordable Care Act Premium Tax Credit) calculation, just for the express purpose of figuring the allowable Form 8962 tax credit.

While that can certainly be done by an expert TurboTax user, admittedly the TurboTax program is not designed to handle such a contingency easily, or online.  For that, we apologize.

Thank you again for your inquiry.

[yunliangchen]

Thanks for the response!  It is very helpful.  Can you please confirm that tax exempt foreign social security benefits should indeed be included in the MAGI?  Is there any IRS publication to reference this?

[GeoffreyG]

Please refer to Pages 2 and 3 of the Form 8962 instructions at the following link:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i8962.pdf">https://www.irs.gov/pub/irs-pdf/i8962.pdf</a>

Under the section for calculating Modified AGI for Form 8662 purposes, a number of things are listed as being additive to it, that are otherwise excluded from regular income taxation.  These items include foreign earned income and non-taxable social security benefits.  While that reference may specifically apply to standard US social security benefits excluded from taxation as a function of US law, it's an easy conclusion to reach (and logical) that the legal intent of this definition would be to also include foreign social security benefits excluded from taxation by treaty, but similarly received by a US taxpayer.

At least that is how the IRS would almost certainly view it.

Thanks.

[yunliangchen]

Thank you for the explanation.  Back to your suggestion of overriding the MAGI in the Turbotax Desktop version.  I followed your instructions, but the Override option is grayed out when I right clicked Form 8962, Line 2a.  How do I make Override functional?

[GeoffreyG]

Try this:

View Form 8962 in Forms Mode in TurboTax desktop.

Right click on Line 2a (Modified AGI).

Select "Data Source"

Select the link from the pop-up box for "Form 1040 Total Social Sec" Benefits

You can "override" the lines on the Social Sec Benefits worksheet, as needed, to add a (nontaxable) dollar amount that will correspond to your nontaxable foreign pension income (excluded by tax treaty).  The amount you enter here will "flow" back onto the Modified AGI Line 2a on Form 8962, and should not affect the rest of your tax return.

[GeoffreyG]

To the extent that your foreign Social Security payments are taxable income for United States purposes, then you should use distribution Code 7 (normal distribution) as your choice here.  That will tell TurboTax to tax your foreign pension payments as ordinary, taxable, income.  You can use this code if you follow the reporting method outlined under the Form 4852 (Substitute for 1099-R) data entry.

A different, alternative choice, would be to forego using Form 4852, and to declare your foreign pension instead as "other income" directly on Form 1040, Line 21.  Regardless of which method you chose, however, the end tax result is the same.

I discuss the tax treatment of foreign pensions in somewhat more detail at the following TurboTax AnswerXchange link:

https://ttlc.intuit.com/questions/3767877

But the answer to your original question, and they way to resolve your current issue in the software -- assuming that you didn't repay any of your foreign pension benefits, or didn't have another "unusual" event or experience regarding them -- will be to use Code 7 (normal) for the Form 4852 8(j) entry.

Thank you for asking this question.

[davidg]

Is the end result the same? According to P915 page 2 foreign social security payments in some cases are treated as annuities. If so, there is a cost basis that would reduce the taxable amount (that is, the 'taxes' paid into the foreign social security system). if I report on 1040 Line 21, would i just report the taxable portion?

[tgrau]

hi thank you for those detailed information.

I live in switzerland and will be receiving a pension lumpsum, I enter the amount into 1040 line 21. the new tax calculated is 1/3 of what I'm supposed to received. I will be taxed in Switzerland at the time of payout, but just a saml 3%. I'm under the impression that the US has a tax treaty with switzerland. Would I still have to report this as income and pay taxes on it or where am I going wrong? I hope you have an answer it is extremely difficult to find a straight answer anywhere

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