US Taxes on Foreign Pension Income

[Arneoker]

My wife is dual citizen of the US and Colombia. She just received a pension bonus of about $25,000 covering the work she did in Colombia for various employers. She has been living the US for over 20 years. Is my understanding correct that we are potentially liable to pay US Taxes on this pension bonus, but that it would be offset by the taxes she pays in Colombia? When do we need to pay the US taxes on this pension bonus, the year she actually received it or the year she pays taxes to Colombia so we can see what US taxes we need to pay?

[pk]

@Arneoker ,

(a) you recognize the income in the year that you received the income

(b) for US tax purposes, only US status is recognized i.e.  US Person ( citizen/GreenCard/Resident for Tax Purposes ) -- taxed on world income   OR   Non-Resident Alien -- taxed only on US sourced income.

(c)  Because there is no "in-effect" tax treaty between US and Colombia, there is no "double taxation" protection -- implying taxes paid to Colombia on Colombia sourced income is not eligible for "foreign tax credit".

(d)  You could report this  "pension" lump sum payment as a 1099-R equivalent, especially if she had contributed to the fund i.e. reduce the taxable income by the amount she had paid in during her period of participation.

Is there more I can do for you ?

[Arneoker]

Thank you very much for your information. I have a few more follow up questions:

1, I suppose I need to obtain the statement showing the payment of this bonus and then file an estimated tax payment. How would that work specifically, especially as this wouldn't be reporting more or less regular income but a one-off bonus?

2. Since of course the exchange rate varies all the time which one would I use? Would it be the exchange rate in effect on the date of the payment?

3. From my research I thought that I would be able to get some sort of break on the taxes paid in Colombia on this bonus. Would I at least get a deduction if not a credit? Thank about the information about the contributions, at least I can deduct those.

Thanks again for your help on this.

[pk]

@Arneoker , my answers in Italics:

1, I suppose I need to obtain the statement showing the payment of this bonus and then file an estimated tax payment. How would that work specifically, especially as this wouldn't be reporting more or less regular income but a one-off bonus?

Because this is "pension", you report it as if a 1099-R was received -- use  code 7 for normal distribution, -see instructions for 1099-R here  -- 2025 Instructions for Forms 1099-R and 5498.

2. Since of course the exchange rate varies all the time which one would I use? Would it be the exchange rate in effect on the date of the payment?

Ideally you should use the exchange rate in effect at the time of  each transaction.  However, an annual average published by US treasury or any other published source can also suffice.  But be consistent  i.e. use the same source for all the transaction(s)

3. From my research I thought that I would be able to get some sort of break on the taxes paid in Colombia on this bonus. Would I at least get a deduction if not a credit? 

Please see IRC section 901, 904 for whom and what type of foreign taxes are eligible for  foreign tax credit.  Two items to note here ---(a)  the statute uses "citizen" through out as to whom is eligible. However, and in general US citizen for tax purposes  is undisguisable from "US person" used in other statutes  --US person  implying  US citizen, GreenCard holders and Resident for Tax Purposes.  Thus  the position  that for foreign credit to be available for taxes paid to a country, that country must provide a substantially similar tax relief to a US person if he/she were a resident of that country;  (b)  the statute does not clearly stipulate  that  there must be a  double taxation treaty in effect with the other country but the language  used  between the different sections of 901, it cannot lead to any other interpretation.

Note also that there is no such limitation ( tax treaty in effect requirement ) for deduction of foreign taxes paid  as "State And Local Taxes " subject to SALT  limitation , if and only if itemized deduction is used.

Is there more I can do for you ?

[Arneoker]

My followup question is this:

Since we are talking about a likely tax liability for this of over $4,000 I'm thinking that I should make the payment this year and not wait until next year to file my 2025 tax return. What process should I follow to do that, other than of course completing the 1099R as you described. Can I use Turbotax for this even though I've already used it to file my 2024 tax return? 

Thank you so much. I may have more later.

[pk]

@Arneoker 

Preparation / recognition of the "pension" income  ( I am assuming that you received  the amount in 2025 calendar year) can be done using TurboTax.  I am quite biased towards using  the Windows downloaded version -- every thing stays on my machine  and I can use the forms mode to see how the forms are being filled out / make changes to the worksheets if needed --plus I am quite unfamiliar with the on-line product.

If , however the amount was constructively received during 2024, then you will have to  amend your 2024 return to recognize the income.

Assuming 2025 receipt, an estimated payment can be made -- you can use  2024 TurboTax to create the estimated payments for the 2025.     Don't forget this income may also be taxable income to your state of residence.

If the monies rested in a foreign bank account that you own or have signature authority over, you may come under  FBAR ( form 114 at FinCen.gov and ONLY on line )  and FATCA ( form 8938 along with your return ).  Thresholds for filing these are here --  Comparison of Form 8938 and FBAR requirements | Internal Revenue Service

Is there more I can do for you ?