Taxable amount for 1099-R when residing overseas

[dvwilkie]

I am preparing taxes for my mother who lives overseas, in a country with a tax treaty with the US.

There should be a way for Turbo Tax to determine that the taxable amount for pension payments is zero, in the same way that you determine it's 0 for Social Security payments, if the taxpayer lives in one of those tax treaty countries. 

Currently I have to override the "Taxable Amount" and manually enter 0 and then I fail the error check: "Taxable amount should not be zero if there is no prior year excess traditional IRA contribution on line 4 of the IRA Information Worksheet."

[JamesG1]

What is the nature of the IRS form 1099-R?  What code is reported in box 7?

The tax treaty is with which country?  Please clarify.

[dvwilkie]

Thanks for helping. The tax treaty country is the UK. There are two 1099's, one has a "4" in Box 7 and one has a "7". But the same event (death of spouse) drove the pensions to go to my mother. The tax treaty clearly exempts annuities and pensions (and Social Security) from being taxed in the non-resident country.

Thanks!

[SusanY1]

The proper way to report these is not to zero out the tax in 2b, but to take a credit on the tax return for income "re-sourced by treaty". 

This is done in the Foreign Tax Credit (Form 1116) section of TurboTax.   This requires completing the UK tax return first, to determine the amount of the tax credit that is eligible to be taken on the US tax return for the income.  If the UK return is complete, you can enter the amount of the income that was taxed as well as the tax paid in this section. 

If it isn't yet complete, you may wish to file an extension to extend the due date of the return until after the tax information is available.  

For more information about filing the Form 1116 in TurboTax see Claiming the Foreign Tax Credit.  For information on how to file an extension, see How do I file an IRA tax extension.

 

[dvwilkie]

Thanks for your reply.

Your proposal doesn't work with the way the UK tax return needs to be completed, which requires the completed US tax return as an input to the UK one (for the purposes of declaring income and foreign (non UK) taxes. My mother is not a US resident, so her UK tax position dominates her situation. Your proposal makes it seem that her US tax is the priority. 

Similar to previous years I filed the taxes with the error and added explanation notes.  These were accepted in the past, including getting refunds. It's just clumsy.

Thanks,

David

[SusanY1]

If the UK tax return requires the US first - then the tax must be paid and a credit taken on the amendment.  If filed the way that you suggest, it is nearly certain that a notice will be issued for the 2024 tax year and additional tax assessed, even if this didn't occur in the past.  Updates to the matching systems the IRS used now look for data in that box, and this is not the correct way to adjust for income covered under a tax treaty.  

The technically correct way is as I described previously, with the tax credit for income re-sourced by treaty.   If the resident country requires the US return to show and report the income, the tax should be assessed to the US tax return, and then an amendment filed to claim the credit.  

Alternately, an adjustment can be made to Other Income (in TurboTax this is done under Less Common Income, Miscellaneous Income) for a negative amount and then Form 8833, the Treaty Based Disclosure Form attached to the return explaining the position.   Form 8833 isn't included in TurboTax but could be attached to a mailed return.  This often communicates to the IRS enough information for them to determine that there would not be due so they don't pursue the issue further, but not always.  Sometimes you will get an examiner who insists on the proper method of filing through tax credits- since depending on other factors in the return the result isn't always the same using the negative adjustment versus using the tax credit.  

Acceptance of the return in the past isn't really the same as approval of the methods used, it just generally means the return didn't trigger selection for manual review.  

[dvwilkie]

Hi Susan, thanks for your detailed help.

The taxes are filed manually (since no tax is paid, none was taken, so there's no hurry to get a refund.) I will consult with my mother's tax advisers in the UK to determine if there is a way to proceed per your recommendations, filing the UK taxes first and getting an extension on the US side. There is only a 10 day window between when the UK taxes open up on April 5 and the US tax season closes on April 15.

I am definitely against paying the tax and then claiming a refund through amendment. They didn't take any tax out, so sending money only to claim it back just doesn't seem like the right way to proceed. Also, the last time we filed an amendment it took over 2 years for the refund to come through, and with the state of the IRS today I don't expect that will have improved. 

Thanks again for your assistance.