reporting tax on overseas pension

[Richard67]

Hi,

I am processing of cashing in 100% of pension in the UK.  I am not entirely sure on how to report the income on my US tax return as follows:

1)  The payment will be subject to tax at source.  In other words, the UK pension provider will withhold tax on behalf of HMRC.   Am I correct in thinking I should report the full value of the cash out (ie pre the UK taxes being withheld) on my US tax return, and not just what is paid to me post UK tax being withheld?

2) The pension provider will use an emergency tax code, as I am no longer a UK tax resident.  As such,  I will overpay UK tax and I come claim some back.    I can also claim taxes back under the  US/UK double tax treaty, but that process takes longer.  However, either way, is any tax refund from HMRC reportable as income in US?   I assume that would only be the case if I report the pension income as what is paid to me after UK tax is withheld and not before it's withheld?

Thank you Richard

[tagteam]

@pk (again)?

[pk]

@Richard67 ,

(a) When you receive the monies from UK pension ( taking a lump sum ), you recognize that amount  in the  US tax year when you receive it.  You report it just like if you were liquidating a US pension fund  ( kind of ) -- you report the total received and your basis ( your contribution total )

(b) For handling the taxes paid to UK  there are  a few options ---{1.} you report the initial amount paid ( assuming that you pay excess before final settlement ) --- show your gross pension as foreign income, taxes as foreign taxes paid  and get foreign tax credit ( note that this is limited by ratio of total foreign income to total world income), generally you will not get 100% credit;  Then when you get your UK taxes finalized, you file an amended return to reconcile the difference in foreign taxes;  {2.} you recognize the Gross income from liquidating  pension fund as in {1} above, ignore  the foreign taxes  and when everything is settled then file an amended return to claim foreign tax credit; {3.} you delay your US filing till ( generally not past Oct 15th ) the UK taxes are settled and then file  thus avoiding need for amending filed return.  {4} this last option while not quite right , is to recognize only the final amount received i.e. Gross less taxes paid ---- this is attractive only because  this does away with a whole bunch of paperwork and if the difference in the final tax liability to IRS is small , say under $100 ---- depends on tax liability less foreign tax credit -- then IRS will not bother. But ,as I said , this requires very careful work through to make sure that there is minimal disadvantage to the IRS and the argument for this is that paperwork reduction / simplification / and very small or nil cost to the IRS. 

 Any adjustment to recognized foreign tax or to the net amount is taxable income and must be recognized.

Does all of this make sense ?

Is there more I can do for you ?

pk

[Richard67]

Hello pk, thank you so much for taking the time to give such a detailed response.    Given, as you say, there are a number of options, and given cash flow is not a major issue for me.  I am considering the below option, which I think is similar to your option 2, but I am not clear whether it would be acceptable. 

1) report gross amount of UK pension cash out on my 2022 US return - ie pay US taxes on the gross amount, even if I will also be paying UK taxes...

2) ...but do NOT report any of the taxes paid to the UK government, that were withheld at source by Uk pension provider.  

3) Under double tax treaty, claim all the UK tax back from the UK government.  That process can take time, but given I have not been a UK tax resident for many years, under the treaty I believe the UK gov will give me 100% refund 

4)  Where I am uncertain is, once I receive the refund from the UK gov, whether the IRS would consider that income even though I would have already reported the gross pension income on my 2022 US return.  It would seem like in that scenario the IRS would be taxing me twice.  Maybe that is why one HAS to go the route of reporting all income (ie gross pension and any tax refund)  AND taking a foreign tax credit?

[pk]

@Richard67 , thank you for responding back. 

Yes your idea should work and because you have paid taxes on the gross, any amounts coming back to you should not be taxable  income for US purposes.  Just keep good records.

Is there more I can do for you ?

pk