Foreign Income + Pension

[Takumi571]

Hi -I am a US citizen residing/working in UK for a UK company which has a company pension plan. I did not get any income in US in 2019.

If below are given:

X - my gross income (income tax and national insurance deducted each month)

Y - My contribution to pension scheme which is deducted from my salary X (not taxed)

Z - Company contribution into my pension which I won't be able to touch until age 65 (not taxed)

How do I report my foreign income and which form shall I use knowing that the sum of X+Z will be below the limit of Foreign Earned Income Exclusion (FEIE)  (memo: assuming Y is not important  and already within X)

1) X + Z with form 2555

2) X with form 2555 + Z with form 1099-R

3) or else?

Also:

A) How/which category do I show 'Z'?

B) Which additional form should I fill and can I do all with turbotax online without any mail?

Thanks 

[pk]

@Takumi571 , if you were working  here in the USA and  had exactly the same situation  i.e. earnings of "X" taxed  by the Feds, you   (Y )and your employer  (Z) contributed to retirement fund ( like a 403.a / b  )  then  your AGI would only include  X or X-Y , depending on the kind of retirement fund and the amount of contribution etc.  The employer contribution  and the  growth on Y+Z is not taxed till you start receiving distribution from the fund.

This exactly how a foreign pension fund would work --- note though that  depending on whether IRS considers  this fund a qualified  retirement fund, can  affect the  reporting requirement.  US and UK tax treaty also may impact this to a great extent.   Therefore  suggest you provide more info as to the retirement fund that you are participating in ---  does the employer administer it or the govt. , do all employees are allowed to participate, is  the employer contribution   based on a rule ( percentage of your  salary  e.g.  you are a max of 10% of your gross and the employer contributes a max of 5%  etc. ), is it available to highly paid employees etc. etc.

If the plan does not meet to be a qualified plan, then  you report  X as your foreign earned income , exclude Z ( because it  would not qualify for constructive receipt ).  Then when you start receiving pension, your  basis in the pension   would be  Y and the  Z + growth of (Y+Z)  would be taxable over the life of the pension

Does this help ?

[Takumi571]

Hi @pk 

Thanks for your answer.

It is a employer pension not government and all employees are allowed to participate it.

There is a defined rule for employer contribution based on the percentage that each employee contribute from his/her gross salary

(i.e if  employee participate with 4% + employer add an extra %5 / If employee raise it to 5%; employer percentage increase to 6% )

So if it is determined as a non qualified pension; does it mean that I can ignore the amount coming from the employer?

Either way; i won't be able to touch the pension until I become 65 and will pay its tax in UK when I try to get it 

Thanks

[pk]

@Takumi571 , from a conservative approach, I would assume that this is not a qualified plan and therefore include your total wages as part of foreign earned income ( even though the UK is calling it qualified and thus  not taxing your contribution) i.e. you expose "X" as your earnings to US taxes.  This assures that your basis in the plan  is "Y" per year.   Therefore when you get distribution from your pension plan , you would be taxed by the US on the growth of Y + Z & its growth.  You take the position that this portion is not constructive receipt till distribution.  I think that will be safest way to proceed.

If you are willing to take a more aggressive approach ( I really don't see advantage  in this  ), you claim your total wages  is X+Z or X-Y+Z (??) --- the problem with this would be a leaky defense of the constructive receipt principle and when receiving distribution from the plan your basis  may be lower but advantage is you will only pay on the growth ( you have to able to prove that  if challenged ).  It is more complicated  and good records  needed may be 30 years from now (?) and who knows what the rules would be.  

None of this would change UK taxing 

[KarenJ2]

You will not be able to deduct the deduction for National Insurance from your gross wages  for US tax purposes. I assume you are not including it in your gross wages.

It appears that you may be able to deduct your UK pension contributions from your UK wages for US tax purposes. Please see Article 18  US/UK Treaty  The Foreign Pension Plan Dilemma for American Expats

Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income 

and

Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income

[pk]

@Takumi571 , what @KarenJ2  is referring is  to article 18 of the US-UK treaty -- here is the relevant portion of the  treaty:

2. Where an individual who is a member or beneficiary of, or participant in, a pension
scheme established in a Contracting State exercises an employment or self-employment in the
other Contracting State:
a) contributions paid by or on behalf of that individual to the pension scheme
during the period that he exercises an employment or self-employment in the other State
shall be deductible (or excludable) in computing his taxable income in that other State;
and
b) any benefits accrued under the pension scheme, or contributions made to the
pension scheme by or on behalf of the individual’s employer, during that period shall
not be treated as part of the employee’s taxable income and any such contributions shall
be allowed as a deduction in computing the business profits of his employer in that other
State.
The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by
the other State to residents of that State for contributions to, or benefits accrued under, a
pension scheme established in that State.

So yes, you can indeed claim  your contribution to the pension scheme as an exclusion to your US income ( i.e. you report X-Y as your gross income.  But my point was that if all your income in the UK is excludable , you derive no benefit by reducing the  income by the contribution -- and you also have the  later burden of zero basis  in your distributions.   That is why I took the more conservative approach of assuming the plan is NOT qualified.  You have a choice here

[Takumi571]

@pk @KarenJ2  - thanks for your answers

Since my gross salary (net salary + UK tax + national insurance + the amount that 'I' contribute to my pension) will be below Foreign Earned Income Exclusion (FEIE) limit; I have no intention to deduct any of them from my income (neither national insurance nor my pension payment 'Y')

So I will be using actually a conservative approach as you mentioned above.

However I am confused with the 'Z' (the contribution of my employer on pension scheme)

I don't see it in my pay roll and even no tax will be realized according to US-UK treaty; I am not clear how to report it

a) Do I report my income as X+Z together? (Since Z is not in my pay roll; it will be difficult to show it I guess)

b) If not; how do I report Z? I found below answer from @Irene2805 

--------------

- How is the pension correctly reported in Turbo Tax?

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:

1. On the Wages & Income screen, scroll down to Retirement Plans and Social Security.
2. Click the Start/Revisit box next to Social Security (SSA-1099, RRB-1099)
3. Click the Yes box on the screen, Did you receive Social Security or Railroad Retirement benefits in 2019?
4. On the Tell us about the benefits you received screen, enter the amount of your foreign pension in Box 5.
5. Back on the Wages & Income screen, scroll to Less Common Income.
6. Click the Start/Revisit box next to Miscellaneous Income, 1099-A, 1099-C
7. On the next screen, click the Start/Revisit box next to Other reportable income.
8. Click the Yes box on the Any Other Taxable Income screen.
9. 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.]

[pk · Accepted solution]

@Takumi571 , now that we are settled on how you are going to handle your income statement, we can look at the employer contribution to the retirement plan.  As I said earlier, this is not constructive receipt-- you do not report it to the US today.  When you take distribution from your pension plan --- your taxed ( by the US , in that this was not excluded from your world income for US tax purposes ) contribution becomes the basis  in the plan and must be recognized over the life of the pension.  The growth of the fund ( including the employer contribution and its growth ) will be taxed  by US at that time -- all you have to prove is your contribution to the fund. That is the time the US-UK tax treaty conditions will come into play as to the amount and which contracting state taxes  the amount(s) . You DO NOT put up 8833 now.

Does that make sense ?  or do you need more on this 

@KarenJ2   note

[Takumi571]

Hi - @pk 

Thanks for you help and guidance. It is all clear now.