Substitute 1099-R for a Foreign Employer Pension Lump Sum Payment

[blackcomb_boy]

I left Canada in 2019 after living and working there for 2.5 years. I returned to the USA to live and work. I cashed out of my employers' pension plan upon leaving, and received the lump sum proceeds in Canadian dollars minus 20% withholding tax by the Gov't of Canada. How do I handle reporting this income on my 2019 US tax return? Is this pension cash out handled as part of foreign earned income exclusion, or as a substitute 1099-R, or something else?

[ColeenD3]

You would follow the steps below to report it.

The benefit from Canada Pension Plan is reported under TurboTax Social Security Section.

1.  After sign in, select Take me to my return /

2.  In the Search box , at right upper corner, type in SSA-1099 , then Enter /

3.  Select the 1st choice on the list - Jump to SSA-1099 /

4.  Program will take you directly to screen, Social Security Benefit-Did you receive any Social Security benefits ? / select Yes-Continue / screen Tell Us About the Benefits You Received 

This is from the IRS website:

The taxation of payments received from Canadian retirement programs that are similar to the U.S. Social Security system receive special tax treatment due to an income tax treaty between the United States and Canadian governments. The way this income is taxed depends on the recipient’s residence.

The special tax treatment applies to payments receive from the following Canadian retirement programs: Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS)

If the recipient is a resident of the United States, the benefits:

• are taxable only in the United States,
• are treated as U.S. social security benefits for U.S. tax purposes, and
• are reported on Form 1040, U.S. Individual Income Tax Return (or Form 1040A) on the line on which U.S. social security benefits would be reported.

If the recipient is a U.S. citizen or lawful permanent resident (green card holder) who is a resident of Canada, the benefits are taxable only in Canada.

[blackcomb_boy]

Thank your for the reply and guidance. Unfortunately this income is not part of CPP or OAS programs administered by the Gov't of Canada. This was a pension plan through a private employer. I cashed out of it since I was leaving Canada to return to the USA. Do you think I'd handle the income reporting the same way as you advise?

[MaryK4]

No, to enter foreign pension in TurboTax online program, you will need to create a substitute form 1099-R.

Within your Personal Tax section, Under Retirement Plans, select the IRA, 401(k), Pension Plans (1099-R).

• On screen, Your 1099-R, answer Yes and select Continue
• Next screen, Choose your bank or brokerage, select I'll type it in myself
• On the screen Tell Us Which 1099-R You Have,  check the box " I need to prepare a substitute 1099-R" and follow the prompts. 

As to the Federal ID, if your foreign issuer does not have the ID number, try entering nine 9s.  If electronic errors occur due to 1099-R data entry, enter the pension under Miscellaneous income, see below.  As long as IRS has the pension reported and included in total income, it is not problematic. 

Less Common Income ( very last section on the screen) 

Select Miscellaneous Income , 1099-A, 1099-C- Start 

Select Miscellaneous Income- Other income not already reported on a Form W-2 or Form 1099-       select Start to information

(Where to enter foreign pension income )

@blackcomb_boy

[blackcomb_boy]

Mary, many thanks this makes sense. Couple clarifying questions:

1. The Federal ID you referred to is a US Federal ID, correct?

2. Since the Canadian government withheld 20% of this payment for Canadian income taxes, am I expected to pay taxes again on the full lump sum pension payment amount to the US government? Or do I adjust the dollar amounts entered in the substitute 1099-R to account for this? On the substitute 1099-R there is an a box that asks for federal tax withheld, however I assume that is US Federal tax withheld?  Or do I have to complete form 1116 to request a foreign tax credit?

Best regards

[ThomasM125 · Accepted solution]

The federal ID number would be a U.S. federal ID number. You should report the full amount of the distribution on your tax return and then file for a foreign tax credit to get a refund of the taxes paid in Canada.

[blackcomb_boy]

Very good info, thanks! For clarity: filing for a foreign tax credit to get a refund of taxes paid to Canada.....is this filing with the IRS, and will the IRS refund the tax amounts paid to Canada? Or are you guiding that I'd apply to Canada for the refund of the 20% withholding?

[JohnB5677]

The foreign tax credit will give you credit for the taxes you paid to Canada on your US tax return. It will not generate any refund or amount due to Canada.

[blackcomb_boy]

I'm getting alternate guidance in a different tax forum on this same topic.

If the lump sum pension payout was made prior to moving to the USA, then this other forum is telling me that it is not reportable on my US tax return. Does this make sense to you TT experts? Seems suspect to me. Thank you.

[KarenJ2]

Are you a US citizen or green card holder?

[blackcomb_boy]

US Citizen, yes

[ThomasM125]

As a citizen of the United States, you must report all income received if you have enough income to require you to file a tax return.

[blackcomb_boy]

When preparing a substitute 1099-R for this foreign pension pay out, what code do you recommend for BOX 7 (distribution code)? The TT program relies on this code to properly make the calculations.

Also, BOX 2a (taxable amount) - guidance on this too please. I'd assume a person would leave that box blank in this situation?

[Squib]

Does inserting the foreign pension in miscellaneous income reduce the benefit of the pension on the overall tax return? 

[DaveF1006]

No, don't report this under miscellaneous income. Please use the steps provided in this Turbo Tax link as it is very detailed on how to report this. I am not sure what you mean by "reducing the benefit" unless the amount was not paid in US dollars. You would need the US dollar equivalent of your pension to report the distribution so that you are taxed in US dollars.  Hopefully this is what you are asking. 

Also, if you paid foreign tax and if that country has a tax treaty in the United States, report the foreign tax paid to avoid double taxation. 

To enter a foreign tax credit on form 1116, go to:

1. After sign into your account, select Take me to my return

2.  At the right upper corner, in the search box , type in foreign tax credit and Enter 

3.  Select Jump to foreign tax credit 

4.  Start with screen Foreign Taxes and select Continue  to follow prompts.