Is UK Universal Credit Taxable In The US?

[UKTaxQuestions]

My husband is a dual-status alien that we're treating as a US resident for the entire year, per Publication 519 (Choosing Resident Alien Status). We are filing a joint return for the year 2024. The only income my husband received was Universal Credit (unemployment) payments from the UK's Department for Work and Pensions (DWP). Each payment has a total entitlement, which consists of:

1. Standard allowance (deposited to his foreign bank account)
   • Side note: this is his only foreign bank account, and it never met the thresholds for FBAR/8938 reporting - not a concern here
2. Limited capability for work and work-related activity (deposited to his foreign bank account)
3. Housing (not deposited to him - paid to landlord directly)
   
   

According to UK.gov, the UK considers Universal Credit to be a tax-free benefit. However, I'm not sure whether to include these payments as taxable income on our US return, and whether to report the total entitlements, or only the portions he received directly to his bank account.

I figure these payments don't apply to the foreign earned income credit, since they don't fall under payment for professional services, and Publication 54 calls out social security benefits as unearned income.

This seems to be the most relevant section out of the UK/US tax treaty (article 17 paragraph 3), which leans towards "yes" but I may have missed something in the legalese:

3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a
Contracting State under the provisions of the social security or similar legislation of that State
to a resident of the other Contracting State shall be taxable only in that other State.

Do these Universal Credit payments need to be included as worldwide taxable income on our US joint return? If so, would the housing portion also be included? How would they best be entered on TurboTax as income? 1099-G seemed appropriate, but only for US-based unemployment.

[DaveF1006 · Accepted solution]

It depends. The problem is that the Tax Treaty does not address unemployment pay which is what the Universal Credit is.  There is a clause in this IRS link that does mention "If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return".

Article 17 doesn't mention unemployment pay thus this article wouldn't apply in this instance. Article 22 listed as other income and this may be the clause that this income is listed. The way this is written would suggest that this income should be reported on your US tax return.

[UKTaxQuestions]

Thanks for the confirmation @DaveF1006. I found some other threads (like this one) on the topic of foreign unemployment, and general consensus is reporting it as other miscellaneous income. The earned income exclusion wouldn't apply, nor would the foreign tax credit since it wasn't taxed to begin with, so US taxes it is. Cheers!