UK State Pension taxable or tax exempt

[user8856]

I am a US citizen and a UK citizen and permanent US resident. I receive a UK state pension which is similar to social security. Is this pension taxable or tax exempt in the US under the US-UK tax treaty article 17 or 18? If tax exempt, how do I report it on 1040 and/or form 8833? What internal revenue codes do I use on form 8833? Is form 8833 available on turbo tax or do I use the form from IRS website?

[LinaJ2020]

Tax treaty-related matters are out of scope for our advice.  Generally, the UK pension is taxable to the US. You would not file the Form 8833.  However, you would need to consult another professional who is specialized in it for verification.

If it is taxable, to enter the UK pension, you will need to create a substitute form 1099-R. 

Here are the steps:

In TurboTax online,

• Sign in to your account and select Pick up where you left off
• At the right upper corner, type in 1099r, then Enter
• Select Jump to 1099r
• Follow prompts
• 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, UK pensions often do not have the ID number.  Please try entering nine 9s.  If electronic errors occur due to 1099-R data entry, enter the pension under Miscellaneous income, see instructions below. As long as the IRS has the pension reported and included in total income, it is not problematic. 

• To your left, select Federal
• From the top, select Wages and Income
• Scroll down to last section -Less Common Income -select  Miscellaneous Income, 1099-A, 1099-C- Start 
• Next screen, scroll down to Other Reportable Income- Start
• Follow prompts

For more information, see http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions

If it is not taxable to you,

• report your full amount as instructed above. Then enter the treaty exempt amount as negative amount (e.g. -5000) under Other Reportable Income as instructed above.  
• Download and fill in a Form 8833 from IRS to claim an exception.  https://www.irs.gov/pub/irs-pdf/f8833.pdf
• You cannot e-file.  You can still use the TurboTax program to prepare your tax forms, but you need to print them out and submit them by mail along with form 8833. 

[user8856]

There are other post stating that a UK pension which is the British social security is exempt from US taxes under the US-UK tax treaty article 17. So, are the other post incorrect or not? I was trying to find out what Internal Revenue codes are needed on form 8833. Can anybody help in this matter?

[theTA007]

Referring to the other posts saying that UK state pensions are exempt under Article 17, I believe there has been some confusion among the various respondents and experts with respect to the definition of "state pension". 

If the pension was earned in conjunction with being employed by the UK government, then Article 17 may apply.   

If by saying "state pension" you mean the payment from HMRC which is essentially equivalent to US Social Security, then Article 17 does not apply and the entire amount is taxable.   You can ignore all the posts relating to foreign tax credit that may be related to the UK state pension because that is referring to any tax that may be withheld at source before the payment is made.  HMRC does not withhold any tax from state pension payments.

Having said that, I believe that if you made voluntary contribution payments to HMRC to add additional years of qualifying service which increased your state pension, you can take a deduction for that part of the state pension which resulted from your contributions.  For example, if you had 10 years of work in the UK and paid voluntary contributions equivalent to 5 additional years, you would report the entire amount received as income and then make a negative entry in Miscellaneous Income equal to 5/15 of the payment.   If the amount you deduct for this reason is significant then I suggest you contact a tax expert who is specifically familiar with the interaction between UK and US tax regulations.

Also, although taxable income from US Social Security is normally capped at 85% of the income received, that 85% does not apply to a UK state pension.  It is fully taxable. 

Finally, assuming you are not resident in the UK, you will not need to pay UK tax on the state pension even if you are required to file a UK tax return.  The UK will not tax that pension payment to a non-resident, so you can ignore the posts that add to the confusion by referring to taking a foreign tax deduction or foreign tax credit in conjunction with receipt of a UK state pension.

[Mkhawaja]

I am a US citizen.  I worked in UK for NHS .  I am receiving NHS post retirement NHS pension . Is this pension taxable or tax exempt in the US under the US-UK tax treaty article 17 or 18? If tax exempt, how do I report it on 1040 and/or form 8833? What internal revenue codes do I use on form 8833? Is form 8833 available on turbo tax or do I use the form from IRS website?

[HopeS]

Form 8833 is not supported by Turbo Tax. You will need to manually download this form from the IRS website (See the link below) ) and mail it in with your tax return. The mailing addresses for your federal and state returns will be printed out on the cover sheet when you print your return after indicating that you mail in your returns in the Turbo Tax program.

Form 8833

Your UK pension is subject to tax in the UK and not the US.  This applies even though it may not be actually taxed in the UK because of any pensions exclusions there.

Article 18 of the UNITED STATES-UNITED KINGDOM INCOME TAX CONVENTION states:  "...any pension in consideration of past employment and an annuity paid to an individual who is resident of a Contracting State shall be taxed only in that State [the UK].."

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 8, Schedule 1 of your 1040. The negative number will appear on line 8 of Schedule 1 of your return and negate your UK pension entry.

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 2022?
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).

@Mkhawhawaja

[kennethhlee]

I have been trying to understand out why most responses indicated that the UK/British state pension (aka OAP) was reported using 1099-R instead of being included in the SSA-1099 which is how payments from the Canada Pension Plan is handled.

You mentioned the following

Also, although taxable income from US Social Security is normally capped at 85% of the income received, that 85% does not apply to a UK state pension.  It is fully taxable. 

This tidbit is the only time I have seen where I have seen an explanation of how taxation of US Social Security is handled as compared to most other foreign pensions.  The statement 'It is fully taxable' explains why the UK state pension should be captured in a substitute 1099-R or as miscellaneous income and NOT as part of the SSA-1099.

[DaveF1006]

Yes, and the correct way to report this is to follow the steps given by HopeS, including filing the 8833. 

Be sure to click on the 8833 that is hyperlinked in Hope's post to fill out and mail in with your tax return because this is the the treaty-based return position disclosure that you are making required by Internal Revenue Code section 6114. 

@kennethhlee 

[theTA007]

Oh so now I'm (possibly) confused.

Is this thread talking about a pension earned by working for a specific employer in the UK [which could be the UK government] and paid by that entity to the individual as a result of working directly for that entity?

Or is this thread talking about a UK state pension (referenced in one of the emails by its moniker OAP (for Old Age Pension) which is most equivalent to US Social Security?   

I believe the first example (pension paid by an employer as a result of working for that specific employer) qualifies per the referenced Treaty and requires the form 8833. 

I believe the second example (UK state pension) is not only taxable by the IRS but also NOT subject to the 85% cap and so needs to be reported on a substitute 1099-R or as misc income and NOT as a substitute SSA-1099.

Is my understanding correct?

As a side comment, does anybody know why TurboTax does not support 8833?  It is just a text response form.  No interaction with any calculations.  It's painful for some people to be forced to mail in their returns for this reason. 

[DaveF1006]

My understanding is that you will fill out a 8833 if you are claiming a treaty exemption for Social Security income in accordance with this Turbo Tax post written by Irene2805. You are correct that this shouldn't be reported as US Social Security income but reported as Irene 2805 suggests. I would report this as other misc income with the offsetting negative value. UK Social Security can be claimed as a treaty exemption and is not taxable if you claim a treaty-based position with a proper 8833 filed with the return.

As far as why Turbo Tax does not support 8833, we don't have a specific answer. It could be programming, complex calculations that aren't supported. This is information that we have no access to thus we are unable comment on. 

As an FYI, these forms are not supported by Turbo Tax. It does suggest in this link that the reason why they are not reported stems from the fact that few taxpayers actually need these forms. 

@theTA007